On July 14, House Democrats introduced legislation that would fund President Barack Obama’s proposed expansion of public health care by imposing income surtaxes on top earners throughout the country. For single filers, the surtax would be 1 percent for those earning over $280,000, 1.5 percent for those earning over $400,000, and 5.4 percent for those earning over $800,000. For joint filers, the cutoffs would be $350,000, $500,000, and $1 million. In other words, the government would raise tremendous amounts of revenue—over $544 billion over the next decade, according to the bill’s sponsors—for public health insurance, and only the rich would pay.
In fact, however, the costs of the bill are far greater than its supporters would lead one to believe. A recent report by the Tax Foundation unveils how devastating the tax hike could be for the United States as a whole and for New York State and City in particular. The report combined federal taxes, Medicare taxes, and the proposed surtax with state taxes and average local taxes for top earners in each of the 50 states. The results show that if the 5.4 percent surtax took effect, top earners in 39 states would pay marginal tax rates of more than 50 percent. Even in the states with the lowest marginal rates—Alabama, Alaska, Florida, Nevada, and New Hampshire—top earners would still pay the government more than 47 cents out of every extra dollar earned. In New York City, top earners would face marginal tax rates of a whopping 59 percent.
What would the consequences be? Keep in mind two basic principles of economics: incentives matter, and decisions get made on the margin. As the most productive citizens earned less for each extra hour worked, the smaller incentive to work would make them more inclined to choose leisure over labor. Top earners would work less—this is economic fact—and produce less than they otherwise would. State revenues, donations to charities, and consumption would all decline. And facing smaller incentives to expand their businesses, the most productive citizens would also employ fewer workers. Top earners might even cut their production to such an extent that federal-government revenue would fall.
If the surtax becomes law, New York State and especially New York City, which is home to a disproportionately high number of people earning over $800,000 per year, can expect to bear an incommensurate share of the burden. A September 2008 study by the Empire Center for New York State Policy found that under then-candidate Obama’s tax plan, which is very similar to the one before Congress now, “New York State’s share of the Democratic candidate’s tax increases would come to nearly 11 percent,” despite the fact that the state held only 6.4 percent of the nation’s tax filers.
Further, New York State and City will endure particularly high falls in revenue, since they benefit only from the taxes that they levy themselves, while workers respond to their total tax burden. If New York’s most productive citizens are able to keep only 41 cents of every additional dollar they earn, they will work and earn less—or flee—and the state’s and city’s tax revenues will fall in tandem with their incomes.
The super-wealthy are not a negligible fraction of the tax base; they are the ones keeping New York government afloat. As Myron Magnet points out, in New York City, “1.2 percent of the taxpayers—40,000 households—pay 50 percent of the income taxes.” With these top earners working less or even leaving town in the face of the new marginal tax rates, New York City government coffers will face a huge blow. The September 2008 Empire Center study found that “changes in taxpayer behavior induced by Obama’s plan . . . would reduce New York State personal income tax revenues by $800 million to $1.1 billion. New York City would see its income tax revenues shrink by $144 million to $285 million during the same period.” With tax revenues from Wall Street drying up, and New York State and City government mired in debt, while spending continues to increase, these falls in revenue could prove unaffordable.
Under the proposed legislation, then, New York’s private-sector economy and public-sector revenues would flounder together, and both would be hurt disproportionately with respect to the rest of the country. (How ironic that it was New York’s own Charlie Rangel who introduced the legislation.) Budget deficits would rise while prosperity fell. As New York City’s top earners worked and produced less, all while being taxed more, they would have less disposable income to donate to the already struggling cultural institutions that make the city desirable despite its high taxes. They would have less money to give to charities that, unlike the proposed health-care reform, have proven their effectiveness. And they would have less incentive to expand their companies, in a time when New York is already suffering from high unemployment.
Taxing the super-wealthy to fund a well-intentioned social program may seem like a reasonable idea at first. But the unintended consequences of this plan would make all of us—not just the super-wealthy, and especially us New Yorkers—worse off economically, impoverished culturally, and increasingly beholden to the government.