We know that countries suffer when taxes get too high, in part because investors, entrepreneurs, and other successful taxpayers escape to jurisdiction with less oppressive fiscal regimes. France is a glaring example. On steroids.
We know that states also suffer when the tax burden becomes to onerous, leading to an exodus of jobs and investment. California and Illinois are case studies of this self-destructive practice.
But it’s especially foolish for state governments to over-tax because it’s relatively easy to move from one state to another. Escaping a high-tax nation, by contrast, is a much costlier step and some governments impose quasi-totalitarian barriers to emigration.
Well, if states are foolish for imposing excessive taxation, then local governments that do the same thing are downright suicidal. It hardly requires any effort to move to another neighborhood on the other side of a city’s borders.
That’s why Detroit was doomed to failure. It’s why California cities are going bankrupt. And it explains why I’m now very bearish about New York City.
That’s because the voters of the Big Apple just voted for a Mayor who thinks class-warfare tax policy is the right approach.
That’s not going to end well. Here’s some of what I wrote for City AM, a newspaper that serves the London financial community.
The new mayor-elect Bill de Blasio has a tax-and-spend agenda reminiscent of the profligacy that led Greece to fiscal ruin. …It doesn’t take mass emigration to destabilise a local government’s finances, particularly when a city is very dependent on a limited number of high-income taxpayers. That is why de Blasio’s fiscal agenda is so risky. He wants to raise the New York City income tax (which comes on top of the 39.6 per cent federal income tax and the 8.8 per cent state income tax) from 3.876 per cent to 4.41 percent for taxpayers with an annual income over $500,000.
The Wall Street Crowd, however, doesn’t need to call the moving vans right away.
But there is some good news: New York City does not have full control of its fiscal affairs. Any changes in the local income tax or local sales tax have to be approved by the state. Democratic governor Andrew Cuomo reportedly has national ambitions, and has expressed scepticism about de Blasio’s planned tax hike. Further, Republicans control the state senate and presumably will not be overly sympathetic to any fiscal plan that pillages Wall Street. So folks in places that compete with New York City – such as London, Tokyo, and Hong Kong – shouldn’t put champagne on ice quite yet. Mayor-elect de Blasio wants to help your cities, but it’s uncertain at this stage whether he will succeed.
If you put a gun to my head, I suspect de Blasio will get some sort of tax hike, but probably not what he wants.
So what will that mean? It’s hard to answer that question without also know what will happen on the spending side of the budget. If he pays off his union supporters by augmenting the already excessive pay and benefits of city workers, then New York City will be on the fast track to fiscal trouble.
But if he “merely” gets a tax hike, then the City’s collapse will take longer. As I noted earlier this year, there are many people who are willing to swallow big tax bills to live in particular locations.
…it’s clear that some people are willing to pay more because they like the non-political features of NYC and the Golden State. For those who like museums, fancy dining, and Broadway shows, there’s no easy substitute for New York City. And for people who like the ocean and a Mediterranean climate, it’s hard to compete with California.
But there are limits. Each time the fiscal burden increases, a few more rich people may decide to leave. And since New York City is heavily dependent on upper-income taxpayers (the government already gets 43 percent of its income tax revenue from this sliver of the population), it doesn’t take much fiscal emigration to destabilize the City’s budget.
Perhaps the most important lesson, though, is that higher taxes on the rich are simply the appetizer course. It’s just a matter of time before politicians go after the rest of us – for the simple reason that you can’t finance a welfare state without screwing the middle class.
P.S. If you want more class-warfare cartoons, click here, here, here, and here.
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Reblogged this on Don't Tread on Anyone and commented:
Raising taxes instead of cutting spending is a recipe for disaster.
one other point… that notorious busy body… statist… and enemy of the jumbo soda… mayor Bloomberg… has noted that roughly 40,000 large taxpayers are keeping New York city afloat… start jacking with such a small number of folks… in order to fund crony perks… redistributionist fantasy policies… and create that collectivist worker’s paradise mayor-elect Bill de Blasio envisions… and you are flirting with disaster… and yes… ultimately… they will have to go for middle class wallets… after all…………………………… that’s where the easy money is…
They come after the rest of us to :
(a) make up for the revenue loss due to rich emigrating, or
(b) staying in place but withdrawing a bit from the stress of top productivity or … the most pernicious of all
(C) Decreased economic growth which makes government grow faster than the economy and thus compounds into a decline spiral.
In short they (politicians) eventually come after us so that the goodies they got us used to (we voted for them after all) don’t quite decline as fast. But it is futile and only makes the eventual decline swifter.
Once the monster of government has decimated motivation production and wealth, then it must inevitably go after its children: the very voters who created it. The very voters who believed in the serial delusion of wealth through flatter effort-reward curves. The HopNChangers who thought that Americans could be forced into the same effort-reward curves as France, but somehow maintain a dynamic, innovative culture.
Actually, my guess is that after an initial, short lived cultural inertia, Americans will head into indolence even faster than the French. They are a heterogeneous nation, with even less cohesion than the French, though that is secondary. In the mid-long term, effort-reward curves are the dominant determinants of growth, dwarfing all other factors.
That being said, it is unlikely that an additional 1%?tax on top of a 50% something marginal tax rate will trigger an immediate tipping point. But the compounding slower growth is real and its path arithmetically deterministic. Also, the NY decline boat is riding on an even bigger decline boat whose new HopNChange growth trendline norm is nowhere near the world average growth rate. Hence, decline bracketed by decline, packaged for electoral consumption as HopNChange.
How do Americans suppose other countries declined? The decline fairy must constantly change its slogans and clothing. But it remains the same fairy of flatter effort-reward curves.
in 1975… New York city very nearly defaulted… no reason it couldn’t happen again… particularly with an incompetent spendthrift administration in place…
from The Nation:
in 1975 president Gerald ford noted in his famous “Ford to City: Drop Dead” speech:
“If we go on spending more than we have, providing more benefits and more services than we can pay for, then a day of reckoning will come to Washington and the whole country just as it has to New York City.” And when “that day of reckoning comes, who will bail out the United States of America?”
good point……………………………………….
Not for a long time, Ed. Other places in the world cannot compete for NYC’s business as, say, the Japanese automakers did for Detroit’s. Further, recall that Detroit lacks the inertia of being a headquarters of a Federal Reserve district and a US Court of Appeals (2nd circuit). Further still, Detroit had a host of racial problems, e.g. a hostile black population and a racist mayor, Coleman Young, that do not loom as large in NYC on account of geographic features of NYC.
Now let’s take a look at some numbers about the shocking increase “from 3.876 per cent to 4.41”. Based on the report above, the NYC taxes before and after the increase on an income of $500k are as follows:
3.876% $ 19,380
4.410% $ 22,050
The difference?
$ 2,670.
[…] Dan Mitchell suggests this wealth-transfer from private to public will happen, but that some of de Blasio’s ambitions may be thwarted by Cuomo and the state government in Albany: […]
Detroit on the Hudson
Maybe Gov. Perry of Texas needs to make another NY marketing campaign.
Reblogged this on Public Secrets and commented:
By electing de Blasio, New York City has put itself back on a path at the end of which lies the corpse of Detroit.