10/13/2009

NY taxes deapening the recession

I read this article about New York increasing the taxes of the rich to help alleviate the stress of the recession. From reading this article I determined that the state government truly did not evaluate the long term effects increasing taxes would have on the economy. Many of New York's wealthiest residents have now moved from the state taking their businesses and the jobs they create with them. This proves that residency in the state of New York is not nearly as inelastic as the state government had anticipated. By raising taxes the state has decreased the supply of jobs available in the New York area. Rather than improving the recession and the unemployment problem the state has only made it worse.

5 comments:

Thomas said...

With the ability to do a large amount of our work from anywhere we can get an Internet connection these days, I think that residency in a specific state, such as New York, will continue to decrease in demand and become more elastic. Why pay more to live in New York when you can get the job done and grow your business just as much in a cheaper state?

As technology continues to take over and become more and more prevalent, there will be no need for premium office spaces in financial hubs of the world like there are now, so states will have to rethink their tax hikes on the rich, especially when things are already as bad for everybody as they are now.

Erin said...

That is a really good point Thomas. With email, web-conferencing, PDAs etc. it really is easy to do business in New York without actually having to be there. I am surprised that the New York officials didn't consider the alternatives businesses have because of technology before they increased taxes.
I also thought it was interesting that businesses are losing millions of dollars because of tax loopholes for closing a business. People are so desperate to avoid further taxation that they are taking any means necessary to get out of the state.

Rebecca said...

I concur that New York missed the mark with such high taxes to the rich. The state legislature was attempting to compensate for revenue short-fall and chose tax hike's as the method.

The lesson of elasticity aside, the other choice, as mentioned in the article, is to reduce spending. Duh. But politicians can't or won't do that. The population of NYC and NY state is large and social programs, law enforcement and necessary services, etc. are obviously burdensome.

What about reducing spending while raising taxes; but not disproportionately to the rich? The rich are the only ones who will notice and can afford to respond by moving their businesses and personal incomes out in great numbers.

What I am thinking of is increasing tax revenue through use tax along the lines of the theory of incidence.

In the textbook at page 155 Png says "regardless of whether a tax is initially imposed on buyers or sellers the market price and quantity will be the same. The incidence of ...taxes depends only on the price elasticity of demand and supply."

NY should cut spending while placing new or raising existing taxes on the goods and services that common people use every day, like an extra tax on pizza, filthy taxi-cabs, bullets and bad attitude (sorry, had to throw some NY stereotyping in there somewhere).

That would be less noticeable to the masses and on the aggregate more likely to make up the difference in the budget.

Brendan said...

It is sad that a government would not look at all pros and cons of a tax increase before implementing it. As Governor Ravitch talks about in the article, people are less "wedded" to the cities they live in. Although some loyalties to hometowns may exist, relocating for a better life seems to be the popular thing. It is too bad the New York government had to learn the hard way just how elastic state taxes are.

Dr. Tufte said...

-2 on Rebecca for repeated grammatical errors.

You folks hit a raw nerve.

I was born in Buffalo, and lived there until I was almost 25.

I left because other states were hiring people with my skills.

When I left, I found out the hard way that New York is one of the few localities in the world with the temerity to determine your tax rate based on all the income you earn, rather than just the income you earn in that state.

In my situation, I was a graduate student who earned about $4000 in my last 6 months in New York. I moved to Alabama and became a professor and earned about $20,000 in the other half of the year. When I went to file my taxes, New York based my tax rate on the $24,000 I earned during the year to collect taxes on the $4000 I earned in New York.

So, what do I think about New York. In as neutral and professional a manner as I can be: I don't think they've implemented passably intelligent fiscal policies there in my lifetime, and it shows.

One further thought: we mostly base taxation on physical location. If you work in cyberspace, where are you located for tax purposes? This isn't a frivolous question: the discussion above outlines how New York views your computer as being in New York if you did any work in the state at all. How exactly can or should they enforce that? Alternatively, if you're honest, who should you pay taxes to?