Don't Index Taxes To Regional Costs

Moneybox
A blog about business and economics.
Dec. 19 2012 8:31 AM

Don't Index Taxes To Regional Costs

There's a commonsense view according to which the "cost of living" is higher in Manhattan than in Portland, OR and higher there than in Portland, ME or Kansas City. Thus people sometimes say that an agenda to tax "rich" taxpayers should take into account the fact that a household earning $300,000 in Manhattan probably has a very different living situation than a household with the same income in Kansas City.

Nick Beaudrot offers a number of good arguments against this proposal, but an important one he leaves out is that the high "cost of living" in in-demand supply-constrained jurisdictions is largely a consequence of the large number of rich people living there. If you raise taxes on people living in the suburbs of San Antonio, that decline in their disposable income will probably lead to fewer and smaller houses being built. But the supply of houses in Manhattan isn't determined by supply and demand, it's determined by the regulatory approval process. If high-income Manhattanites get poorer due to higher taxes, that will largely result in cheaper real estate not less real estate. That's one reason why Jim Geraghty's plan to soak blue state rich people is so appealing—the actual welfare losses involved would be quite small compared to the numbers.

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And it's not just housing. If you look at someting like tuition in New York City private high schools you'll see it's absolutely through the roof. That's because an "elite" educational experience more-or-less by definition can't just scale-up when demand increases. The schools will charge every penny they can get away with charging, and if changes in tax policy means there's less disposable income hanging around the Upper East Side for Dalton and Brearly to vacuum up then the prices will adjust.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

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