Urban Taxation: Deadweight Loss for the Weakest
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Incentive Taxation

Urban Taxation: Deadweight Loss for the Weakest

Wage and Sales Taxes: a Curse on Low Income Citizens and Their Communities

"The middling and superior ranks of people, if they understood their own interest, ought always to oppose all taxes upon the necessaries of life, as well as all direct taxes upon the wages of labour." Adam Smith An Inquiry into the Nature and Causes of the Wealth of Nations, Volume 2, p.289

As many public policy makers know, we've always considered government taxes in a descending order from destructive, to not so good, better and then best. That’s only when people even think about what we tax as opposed to how much we tax. That is the only way to declare that taxes on work and capital are to be avoided, in order to recreate cities that are fair and equitable places for all to prosper.

We must seek ways to relieve the excess burden of taxation in all our cities and states (and nations), especially on "the little people." This system is particularly pernicious in a city that shouldn't be poor, but is: Philadelphia.

Wage Taxes

Taxes on wages and income are inherently mobile; the tax burden drops or rises based on what rate exists in the jurisdiction. In the context of the American system, there can literally be hundreds of different tax rates on wages. The best example in our experience is the divide between the city of Philadelphia and its surrounding counties. Workers living in the city of Philadelphia pay about 4% (a flat rate) on their wage. The worker – assuming a family of four - in other places just a few miles away pay only the state or a minimal local income tax. That geographical difference to a wage earner that makes $50,000 is significant. This matrix shows the local and state combined income tax for five fairly proximate communities.












Coupled with the regressivity of that wage tax, it makes less sense to live in the city than out. No matter where you live, wage taxes are a barometer of the economy at large. Revenues rise and drop with the economic cycle. It's just not stable.

Sales Taxes

Sales taxes, as policy makers know, are sensitive to geography, very regressive, and highly reactive to economic downturns. Sales taxation hurts business, especially small service and retail oriented business, as well as less prosperous citizens. Citizens that are more prosperous notoriously "border shop" the practice of jumping over the state line for a better deal on a big-ticket item. Case in point? A lovely HDTV, priced at $2,500:

Everyone's Dream

Philadelphia: Why buy There?


Notice that Philadelphia’s sales tax is assuredly an assault on low-earners, who may be trapped into paying more for a product they want due to lack of reliable transport or lack of access to the Internet. They may not even get the product they want, thereby hurting commerce as well as the consumer
Property Taxes

Dropping from worse to better is the general property tax. Until expansion and knowledge of the land value tax (LVT) happens, most local and county governments are going to be stuck with the property tax, and will suffer the unintended consequences of property tax “fixes.” UrbanTools has spent decades studying the effect of the land value tax in place of the property tax, and there is no longer any doubt among serious observers that LVT encourages better places and economically advantaged citizens. (If there is doubt, feel free to contact us.)
2014 and Beyond
Recovery and creativity will not come from the Federal Government. Time is not on the side of the whole fabric of urban society and we urge our readers to present practical alternatives to the politically easy, but economically and socially dangerous ideas to the public. Cities are for more than the "Creative Class"

We sighed when State Senate in New York passed a 2% cap on property taxes at the urging of Governor Andrew Cuomo. We believe that looking past the sloganeering, property taxes still increase on an annual basis with the current mess of the property tax unchanged, just less stuck in the mud for a bit. Yet, New York is a state staggered by high taxes on work and true investment while still giving a pass to the financier class. There is no “Escape from New York.”

It's not just New York: New Jersey enacted a similar cap, but with thought to unintended consequences. Expenditures are considered. Mechanisms to reduce spending are joined to the program. New Jersey looks to the experience of Massachusetts Prop 2.5. (1)

The left and right see the results differently.(2)  Choosing an alternative between a redistributionist approach and an unfettered free market approach would likely produce better and fairer results for all parties concerned; which is where classical economics such as land value tax would come into play.
Other states are considering similar tax caps. This is a shotgun approach to an issue that can be dealt with by a scalpel.

UrbanTools does not maintain a position on how much revenue a government should collect.
As close as we'll get to picking a side, we defer to Joseph Stiglitz: 

"Not only was Henry George correct that a tax on land is non-distortionary, but in an equilibrium society ... tax on land raises just enough revenue to finance the (optimally chosen) level of government expenditure."*

We do believe that there are responsible and irresponsible ways to collect that revenue. We do believe that the land value bubble and bust of the past several years are proof that artificially inflated values can lead to disaster. A property tax cap would also encourage more bubbles. If there is indeed a poor widow, then that poor widow should benefit from the other alternatives to a property tax cap.

Property taxes get the attention, but in states like New York, the inevitable “fixes” are demonstrated by recent history in California, etc.: greater state control of expense and revenue and the use of tax policies that consistently degrade community infrastructure, commerce and individual wage earners.

Refs.:
2. http://www.cbpp.org/cms/?fa=view&id=301 Center on Budget and Policy Priorities and http://www.manhattan-institute.org/html/cr_62.htm Manhattan Institute

*In: Feldstein & Inman, eds., The Economics of Public Services, London: Macmillan. 1977


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