In the recent mayoral campaign, then-candidate Bill de Blasio’s signature proposal was to address New York’s “tale of two cities” – the extremely rich versus everyone else – by increasing the City’s income tax rate for people with incomes over $500,000, from 3.9 to 4.4%. The revenues would be used to fund universal pre-kindergarten, plus expanded after-school programs for middle school students.
It has repeatedly been said – probably correctly – that the proposed income tax increase for high-earners has no chance of enactment because it requires approval in Albany. However, the Mayor continues to push for it, and last year’s election results suggest that it has wide popular support. The question I examine here is simply, does the tax policy literature (in which I write professionally) support viewing the proposed tax increase as a good idea? I believe that it does, even leaving aside the issue of establishing universal pre-K (which could be funded in any number of different ways).
The literature on state and local taxes strongly suggests that, as a general rule, it’s wise to leave progressive taxes to the national level, rather than imposing them sub-nationally (such as in a given city or state). The reason is potential exit from the taxing jurisdiction by high-earners. For example, if one town raised taxes on high-earners while all of its identical neighbors did not, it’s a fair bet that many of the intended targets of the tax would simply leave. Exiting the entire country, if federal income taxes go up for the wealthy, is a lot costlier for taxpayers to execute, and thus is not as much of a problem (Facebook’s Eduardo Saverin notwithstanding).
However, New York is not just one in a sea of identical towns. It has genuine market power these days, as a global destination city like London and very few others. Consider what’s been happening lately to high-end real estate prices in New York. They continue to go up, stimulating all the new high-end construction that we see around us in Greenwich Village (such as at the former St. Vincent’s Hospital site). Clearly, high-earners are willing – at least, up to a point – to pay a premium to live here.
Thus, even if you don’t share Mayor de Blasio’s (and many voters’) discomfort with rising high-end inequality, it would be foolish for New York City not to take advantage of its privileged, albeit not quite impregnable, position. So long as we can secure significantly more tax revenues, with only relatively modest behavioral responses (such as exit by high-earners), it would be like leaving money on the table for the City not to try to extract a bit more.
Obviously, this argument – like that for increasing the minimum wage – can only be pushed so far. Overdo it, and you shoot yourself in the foot. The more the tax on high-earners goes up, the more tax base is likely to be lost per dollar of revenue raised. At some point, one would even run into the Laffer Curve, where raising the tax rate actually loses revenue. In my view, however, we are still well short of that point.
Suppose the de Blasio plan is enacted, and it proves a success. How much will it do to address our “tale of two cities?” At least on the tax side (leaving aside the pre-K proposal), the answer is: Not all that much. New York City is a cork bobbing on the waves of the global economy. Overall global trends pertaining to high-end inequality will accentuate – or else not – depending on factors that the City cannot control or even much influence. Yet so long as those trends do continue, and so long as we continue to be a favored global destination city – an asset that we must assiduously preserve – taking modest advantage is not wild-eyed radicalism, but simply sober common sense.
Daniel Shaviro is the Wayne Perry Professor of Taxation at NYU Law School. He has written a number of books on public policy, as well as a novel called “Getting It.” He has a blog at danshaviro.blogspot.com.