Politics & Policy

Of Football and Finance

When a tax plan like Bill de Blasio’s punishes top talent, everyone pays.

France’s 75 percent “supertax,” the centerpiece of François Hollande’s presidential campaign, is running into another obstacle: national pride. The confiscatory tax on high-wage workers would hit the country’s professional soccer teams, whose employees, being extraordinarily mobile, would have very strong incentives to play for teams in lower-tax countries. Pierre Moscovici, the French finance minister, promised to look into a workaround after the head of the French soccer league denounced the “crazy tax,” which, he said, would cause France to “lose its best players.” It would also cost top-division French teams some 182 million euros or more.

Unless New Yorkers come to their senses in some spectacular fashion, it is likely that the next mayor of New York City will be Bill de Blasio, Brooklyn’s answer to François Hollande. Mr. de Blasio has promised to levy new taxes on the incomes of New Yorkers earning more than $500,000 per year, and to spend that money on an assortment of pre-kindergarten and after-school programs — which is to say, paying off the public-sector unions that support his candidacy. Like soccer stars, the stars of finance — the industry hosting most of those $500,000-and-up New York jobs — are mobile. Wall Street is no longer the world’s uncontested financial center. There is London, Zurich, Sydney, Shanghai, Charlotte, Singapore, and any number of other cities that welcome financial workers and financial firms, and are happy to have them. It is likely that President Hollande’s supertax, and, if it should come to pass, Mayor de Blasio’s version of the same, will leave France and New York City worse off, with diminished economies and little or no additional revenue realized.

It is important to appreciate that taxes on “the rich” are not necessarily paid by “the rich.” As economists have understood for a century or more, taxes are in effect paid collectively. As a U.S. Treasury study put it: “The economic burden of a tax, however, frequently does not rest with the person or business who has the statutory liability for paying the tax to the government. This burden, or incidence, of a tax refers to the change in real incomes that results from the imposition of a change in a tax.” Taxes ripple through the markets, changing prices and relationships between buyers and sellers. It is not that businesses just “pass on” their taxes — that is a bit too simple of an explanation — but that taxes change economic behavior, which disperses their costs. Exactly how this works in different markets and under different conditions has been a topic of dispute since economist Alfred Marshall’s work on the subject in the 19th century; generally speaking, how taxes are distributed is tied to the question of substitution and elasticity, both of supply and of demand. The short version is that individuals and firms shift taxes onto one another to the extent that the particulars of the market give them the power to do so.

Consider the case of real-estate taxes on rental properties in Manhattan. Supply is not quite fixed but not far from it; demand is strong and constant, with lots of people who want to rent and not much growth of supply. If you raise taxes on landlords in that situation, they have a pretty good shot at passing most of the expense on to their tenants in the form of higher rents. But if you do the same thing in Liberal, Kans., where there’s lots of real estate and fewer renters, the landlords probably will eat more of the tax hike. If you tell gasoline retailers that they have to pay a 20-cent tax on every gallon they sell, then you can be sure that consumers will pay most of that tax, since there is no good substitute for gasoline in the market, even though price competition might mean that something less than 100 percent of the cost is passed along.

The same dynamic holds true within companies and within markets, as well. Consider the case of a company with a CEO paid $1 million a year, ten top executives paid $500,000 a year, twenty department heads paid $100,000 a year, and 10,000 lower-level employees paid an average of $30,000 a year. If the powers that be decide that they want to charge a 20 percent surtax on salaries of $500,000 or more, those top executives and the CEO will have strong incentives to ask for more pay, in order to not see their real incomes reduced. If the management is inclined to oblige them, then there are lots of places they could go looking for that money — from shareholders’ dividends, for example, from consumers, from suppliers, etc. Another tempting pot of money is that $300,000,000 being paid in salaries every year to those low-level employees.

The question, then, is: Who do you think has more negotiating power within the company? Those top executives or the $22,000-a-year cashier or the $45,000-a-year warehouse manager? Who has more negotiating power within a market? Walmart, or the vendors who depend on its stores for 80 percent of their sales?

Financial firms in New York have a lot of very highly paid traders and executives, but they also have receptionists, accountants, building superintendents, office cleaners, etc. And whether the partisans of confiscatory taxes intend it or not, everybody ends up on the hook to some extent. There’s a lot of cheap rhetoric about social solidarity, but the economic fact is that when it comes to taxes, we are all in this together to a much greater extent than is generally realized. As Stephen Entin put it in his study of the subject: “Because labor is not homogeneous and there are significant differences in the skill mix across the population, the relative amounts of skilled and unskilled labor can make a difference in the wage rates earned by each group. Taxing the earnings of people with significant human capital at higher rates than ordinary labor may prove to be counterproductive to workers, just as excessive taxation of physical capital appears to be. If people with significant human capital withdraw that capital from the market due to high tax rates, the productivity, wages, employment, and incomes of other people who would have worked with them may be lowered. The tax on the personal service income of the highly compensated is then shifted to other workers and factors.” In order words, if the best players leave the team, everybody loses.

It is indicative of the times in which we live that it takes the possible loss of sports stars to make France see that, and that nothing seems likely to sober up New York’s would-be class warriors.

Kevin D. Williamson is a roving correspondent for National Review and author of the newly published The End Is Near and It’s Going to Be Awesome.


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