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Tax Policy the Texas Way--in Washington, D.C.

Article by Ike Brannon June 6, 2014 //   4 minute read

The 620,000 residents of Washington D.C. do not exactly conform to the spirit of supply side capitalism: in most elections the nominees of the various green/workers/socialist parties usually come close to the vote totals of whatever Republican the local party convinced to run.

Nevertheless, the District is on the verge of making a substantial reform that would lessen the tax on businesses and middle-income households, increase the threshold for the estate tax, and generally take a giant step towards making the city friendlier to investment.

This reform was not triggered by political exigencies: Washington D.C. is a one-party town for all intents and purposes--a provision that two city council members must come from an entity other than the majority party (a dubious notion regardless of intent) has been effectively jettisoned by canny politicians who run as “New” Democrats or with some other appellation on their true party affiliation. The city’s vast Democratic constituency has not exactly been clamoring for a more business-friendly environment.

Nevertheless, to its credit the City Council realized that the city has only a limited number of businesses without any option to locate elsewhere. While the U.S. Treasury isn’t going to move out of the District, there’s no good reason that trade associations--whose legions outnumber the government bureaucracy--can’t pick up and move across the river, a short Metro ride away from the Hill.

What’s more, D.C.’s liveable environs (save for during the swelter of Summer) aren’t enough to keep well-to-do retirees from relocating for six months and a day to Florida, Texas, or some other burg without an income tax--or an estate tax not as punitive as the one currently in place in D.C.. In fact, it pays people with substantial retirement income to take a second home almost anywhere in the world other than here and deprive D.C. of tax revenue.

What the District has discovered--a bit belatedly--is that it pays to have wealthy people in a community who buy goods and services, invest, and contribute to the community. For the longest time D.C. has tortured households at all levels of the income distribution: Besides the high tax rate on the well-off and businesses, stiff regulations on construction and land usage keep housing prices high and encourage middle-class flight to the suburbs in Maryland and Virginia.

The tax reform changes that calculus for everyone, from rich to poor. Tax rates fall mildly for those at the top, a bit more for those in the middle, and a more generous earned income tax credit makes working for those at the bottom of the income distribution more remunerative as well.

The District is still a long ways from Texas’ copasetic business climate, but the fact that in an epoch where resentment of the rich seems to have hit a fever pitch in the media, a bulwark of left-wing populism is reducing the tax burden by a billion dollars a year in an effort to attract investment and encourage work might be a better gauge of where the political zeitgeist is heading than the latest New York Times oped. 

Image by Katie Harbath