The Assisted Suicide of Lofty State and Local Taxes

We get the government we choose to elect, hence the government we deserve. Voting for ever-higher punitive taxes on the rich is arguably a form of civic suicide. Consider that a wealthy New Yorker can get a raise of almost 40% just by moving. That’s right. If moving eliminates a 14.8% top state and local tax rate, our top-tier taxpayer gets a 36% raise, not a 14.8% raise, by leaving. It’s doubtful if any of our city and state leaders have done this math, but it’s shocking. Mamdani wants to take the top rate up another 2%, if not by the state then by the city, which would mean that our rich neighbor can get a 42% raise.

The disastrous math of taxes for the sake of taxes

Here’s how the math works. A rich New Yorker pays a maximum state and city income tax of 14.8%, on top of a maximum federal tax of 37%. But there are hidden taxes. Uncapped Medicare and Medicaid taxes push the marginal federal tax to 39.4%. If the income is earned on investments, the Net Investment Income Tax (NIIT, another gift from Obamacare) adds another 3.8%, pushing the top federal tax above 43%.

So, top-tier New York taxpayers may soon pay a marginal tax of 43% to the IRS and 17% to the city and state of New York. The combined 60% marginal tax rates mean they have the privilege of keeping 40 cents of each new dollar they earn. A move to one of the nine states with no income tax allows our taxpayer to keep 57% of every additional dollar of income, instead of 40%. Do the math. That’s a 42% raise.

Forget the argument about “paying their fair share.” “Fair” is an entirely subjective term. Your fair share of someone else’s money might be seen as a ripoff by them, especially if the money is spent less wisely than we might spend our own money. If you are rich and believe you’ve earned your money, will you consider leaving a state for a permanent 40% raise? Of course.

California makes the same mistake with taxes

This is hardly a phenomenon unique to New York. California’s headline top rate of 13.3% becomes 14% with the phase-out of deductions. A Silicon Valley billionaire can keep 43% of each new dollar of income. Moving to Dallas or Miami, or Anchorage for the adventuresome, boosts this to 57%, a raise of almost 33%. This doesn’t even count the “please leave now” impetus of a “one-time only” 5% wealth tax on billionaires. Never mind that the fine print on the wealth tax initiative turns a 5% tax into a 50% expropriation for billionaires like the founders of Google, because their 30% voting share at Google, not their 3% equity ownership, is used to determine the tax.

Laboratories of democracy – with mad-scientist directors

People have called the United States “50 laboratories of democracy.” A state or a city is welcome to impose whatever taxes, regulations, or laws are allowed by its own bylaws or the national Constitution. And citizens are welcome to choose whichever states have taxes, regulations, and laws that they feel best align with their values and beliefs.

Nor is it unique to our various states, with their diverse tax regimes. Taxes drove the Rolling Stones to their own “Exile on Main Street,” relocating to France of all places to escape England’s 90% top tax rate (where a tiny drop to 85% would provide a 50% pay raise). Even Switzerland has divergent tax rates, ranging from 22% in Zug to roughly 40% in Berne, Geneva, and Vaud. Where do the billionaires tend to live? Zug.

Milton Friedman has been credited with the observation that the only thing more mobile than the wealthy is their capital. It is the rich who largely fund government spending, whether that spending is at the federal, state, or local level, and whether that spending is wise or foolish. Instead of a politics of envy, perhaps we should try a politics of gratitude.

This article was originally published by RealClearPolitics and made available via RealClearWire.