A Financial China Syndrome

Is New York Facing a Financial China Syndrome?

Jonathan Turley
October 27, 2009

We have previously discussed the dangers of increasing taxation in places like New York city. Now it appears that the city is facing a tax-version of the China Syndrome where over-taxation may be causing wealthier families to flee, which increases the need for higher taxes on those remaining.

I remain concerned about the incredible spending in Congress and rising taxes in the states as politicians seem to have lost any sense of proportion or balance in buyouts, recovery bills, and public spending. Even the Washington Post is now warning of a “debt tsunami” as the Administration drives up the deficit — already pushed to extremes by George Bush. We are now piling on debt faster than gross domestic product and the CBO is reporting that the publicly held debt of the U.S. government will reach 82 percent of GDP by 2019 — roughly double what it was in 2008. Yet, the Administration is still piling on spending bills and new programs with enthusiastic support from the Democrats. Countries like China have been complaining for months about the disastrous spending spree in the United States and debt overload, here.

The Democrats have been calling for more taxation on the national level which will likely not only drive down some investment but drive many voters back into the arms of the GOP. Obviously, this is hardly fair given the ruinous spending and economic policies of the Bush Administration, but Democrats have shown little restraint in either spending or taxation proposals.

While politicians often insist that they are demanding that people pay their fair share (which is valid in many instances), it often ignores that a small percentage of taxpayers pay the vast majority of taxes. Somewhere between 39 percent and 50 percent of Americans pay no federal income taxes at all. This is not to belittle the fact that there is a huge disparity in wealth, but cities like New York risk a meltdown over these heavy taxation approaches. In addition to new heavy taxes for the city, New York state is ramping up taxes, here.

More than 1.5 million state residents left for other parts of the United States from 2000 to 2008 and, of those, 1.1 million, were former residents of New York City — meaning one out of seven city taxpayers moved out.

The problem is that, in terms of only income taxes, the top ten percent of taxpayers pay over 70% of the taxes, here. The top twenty-five percent pay roughly 87%. Not only are those citizens more able to move to more attractive jurisdiction, but they are also the financial engines for recovery for cities like New York. (This obviously does not include sale taxes and other form of taxes, but the rising taxation levels appear to have had their predictable impact). Once the city tops out on tax levels, those wealthier individuals remaining may not like the city service cutbacks due to the smaller tax base — further encouraging migration. The fact is that New York needs these earners and they are leaving.

To make matter worse, the average Manhattan taxpayer who left the state earned $93,264 a year while the average newcomer to Manhattan earned only $72,726. You can do the math.

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