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Normally I go out of my way to avoid politics because the highly localized hijinks on both sides of the aisle seldom result in anything more than a few headlines. But every once in a while a group of politicians does something so unthinkable that there are huge ramifications for your money.
That's the case with Seattle's latest move – a 2.25% tax on individuals earning more than $250,000 a year and couples filing jointly earning more than $500,000 a year.
Uninformed investors are going to get clobbered when the law of unintended consequences rears its ugly head. Obviously, I don't want that to be you, which is why we're going to talk about what's happening, what it means for your money, and how to defend yourself against this policy and other policies just like it going into effect worldwide.
That's not a mistake and it's not a typo.
What's happening here in my backyard is a microcosm of a far larger chain of events playing out around the world.
Cash-Starved Governments See Only One Solution
In America, Germany, Japan, China – wherever you go – one thing is true…
Governments are starved for tax revenue.
And with a wave of social activism catching the imagination of self-absorbed politicians everywhere, that's led to tax hikes all over the place.
Most recently, Seattle, my own backyard.
Seattle's City Council just voted unanimously – nine to zero – to pass a new 2.25% income tax on everyone making more than $250,000 a year and on married couples filing jointly who make more than $500,000.
And in doing so, Seattle just damned itself to repeating Detroit's mistakes… and Chicago's… and Philly's. Then there's also Baltimore, St. Louis, Newark, and Oakland, just to name a few more failed municipalities.
Never mind the politics.
The economics of a tax like this stink – even if it's yet to pass the courts.
Under the new tax, any person having a gross income higher than $250,000 will find their wallet hit to the tune of nearly $500 a month, or roughly $5,650 a year, and that's after federal taxes in a state that legally has no income tax.
Add to that the recently enacted 10.1% city sales tax – one of the highest in the entire country – and the exorbitant King County property tax rates which affect city dwellers, and the result is clear…
A very well-documented "hollowing out" of Seattle has begun.
The daisy chain of events starts with highly skilled labor leaving. Politicians do not understand that professionals are mobile and so is the money that comes and goes with them.
They'll head for Bellevue, Redmond, Issaquah, or any of a dozen other places. Cities that are all minutes away, where they can live and commute without paying these taxes.
There, these same professionals will be buying new houses and condos to live in after selling their Seattle-based properties which, of course, they'll use for a down payment or to fuel the already out of control rental market.
Businesses that remain will be forced to compensate – which means they're going to jack prices, cut employment hours, or simply close the doors. Disposable income as a whole will go down as those who cannot move become "trapped."
"Local" Companies – and Their Investors – Will Suffer
Right now, Seattle is a rich, vibrant city, which is why critics will say "no way" when they read this. People leaving is simply not possible, the critics will cry. And they're right… for now.
But down the line, things will change, and not for the better.
It's very hard to stop the flight of capital once it begins regardless of why it begins or who starts the process. What's more, it doesn't matter whether you are talking about a tiny town or an entire nation.
If you treat money punitively, it leaves.
And when it does, it takes hundreds of billions of dollars in highly skilled jobs, intellectual capital, and property values with it.
It's not as far-fetched as you might think.
More than two dozen companies have relocated from Silicon Valley and the Bay Area to Austin, Texas, as the Bay Area has adopted similarly punitive and profit-hostile policies against successful businesses and their employees who work there.
Alphabet Inc. (Nasdaq: GOOGL), Apple Inc. (Nasdaq: AAPL), Amazon, and Oracle Corp. (NYSE: ORCL) all have ginormous campuses in Texas, for example. It wouldn't take much to move their headquarters there or even overseas, like dozens of companies have over the past few years if things get bad enough.
Again, I am not making this up. History is very clear about what happens when money moves.
According to the San Antonio Express, more than 1,430 households left the Bay Area for Texas while taking nearly $390 million a year in taxable income with them from 2009 to 2012.
Imagine what that figure is today with the economy in growth mode.
Likewise, Mitsubishi Heavy Industries left New York and went to Houston for similar reasons. Liberty Mutual and State Farm went for Dallas. Facebook Inc. (Nasdaq: FB) chose Forth Worth for a major data center.
Toyota Motor Corp. (NYSE: TM) North America's CEO Bob Lutz noted last year that the company asked all 4,000 of its U.S. employees to move to West Plano, Texas, where the company built a 2 million-square-foot headquarters and that he expected 75% or more to make the move.
Thankfully, there is a profitable solution.
About the Author
Keith Fitz-Gerald has been the Chief Investment Strategist for the Money Morning team since 2007. He's a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to heading The Money Map Report, Keith runs High Velocity Profits, which aims to get in, target gains, and get out clean. In his weekly Total Wealth, Keith has broken down his 30-plus years of success into three parts: Trends, Risk Assessment, and Tactics – meaning the exact techniques for making money. Sign up is free at totalwealthresearch.com.