October 16, 2019

Wealth Matters: Tax Burdens Tilt Coastal, and System’s Fairness Is Debated

But is that really the marker of wealth? After all, earning $250,000 a year in New York does not buy as much as it does in, say, Iowa or Alabama.

Or put another way: Why doesn’t the tax code account for regional differences in tax burdens?

While the question begins with households earning more than $250,000 a year in places like Boston, New York and San Francisco, the issue of fairness is not just for the top 2 percent to ponder. Workers at all income levels are affected by regional differences in federal taxes. Local taxes may also be high in these areas, though economists argue that residents at least get something for those taxes, like good schools and safe neighborhoods. According to David Yves Albouy, an assistant professor of economics at the University of Michigan and an expert on geographic tax inequality, teachers in New York may be among the highest paid in the country, but their salaries don’t give them any extra buying power because the cost of living is so high.

The average pay of a New York public school teacher in 2009-10 was $78,885. But rent for a two-bedroom apartment in Manhattan averages $3,715 a month.

In an article, “The Unequal Geographic Burden of Federal Taxation,” published in the Journal of Political Economy in 2009, Dr. Albouy wrote that wages in New York were 21 percent higher than the national average. At a 33 percent federal income tax rate, workers were paying a 7 percent federal surtax for working here. But even for someone making $50,000 a year, that surcharge worked out to about $3,500 extra a year, he said.

“A lot of the 1 percent lives in New York,” he said, “but I’d say 98 percent of the people who live in New York are part of the 99 percent, and they get the short end of the stick.”

But while one presidential candidate after another has been proposing new tax regimes, none so far has mentioned equalizing the regional differences.

“The system is not totally fair, but I guess the question is, who is it most unfair to?” said Mark Luscombe, principal federal tax analyst for CCH, a publisher of research and software for tax lawyers and accountants. “It’s most unfair to the New Yorker, and no one has much sympathy for the New Yorker.”

Or as Joseph J. Thorndike, the director of the tax history project at Tax Analysts, said, any regional adjustment “might as well be called the Bicoastal Elite Tax Relief Act.” He added, “It would shower all these benefits on Palo Alto and New York City, and the rest of the country would be outraged.”

Still, there are some interesting issues here that raise questions about how we think about fairness and taxation. If nothing else, they will help inform your next cocktail party conversation (or argument).

CURRENT SYSTEM The debate over regional differences is nothing new, Dr. Thorndike said. When the modern tax code went into effect in 1913, “it was viewed as a way to tax those rich Northerners, and to be fair, that’s what it was,” he said.

But starting in World War II, when the tax base widened beyond the wealthiest people, he said, the tax system had to be sold as a shared sacrifice. With this came the idea of horizontal equity — that people at the same level pay the same rate across America.

Today, residents of New York pay about $15 billion a year more in federal taxes than they receive in benefits, Dr. Albouy said. He noted that that money would make quite a dent in the cost of the Second Avenue subway line, which is estimated at $17 billion.

Still, the high earners living in expensive areas are able to take deductions that reduce some of their federal tax burden. These include breaks on mortgage interest, state income and property taxes and charitable gifts.

A flat tax may seem, at first glance, more equitable, but it may mean that people in high-cost areas would lose the deductions that lower their tax bills, Dr. Luscombe said.

GEOGRAPHICALLY FAIR SYSTEM So how would you make the tax system fairer for people who live in more expensive regions?

A cost-of-living adjustment is one way. The military offers that to soldiers stationed in different parts of the country. But measures of the cost of living are considered pretty inaccurate.

Article source: http://feeds.nytimes.com/click.phdo?i=f3a64398dd69f727b5d8b3ee61c3521e