Free Money for Rich People!

It seems like a good idea to make policy through the tax code.  After all, everybody pays taxes and everybody hates taxes.  Plus you can count your policy as a tax cut (yay!) instead of more wasteful government spending (boo!) or (god forbid) welfare.  A recent Bloomberg piece demonstrates the issue with this:

The real estate levy, the city’s biggest revenue source, uses a methodology that undervalues condominiums on Park Avenue, Central Park West and other enclaves of the wealthy; limits tax increases for owners in brownstone neighborhoods such asGreenwich Village and Park Slope; and shifts the heaviest burden to renters, many of them poor.

For New York City and neighboring Nassau County, the [1981] law created four classes of property — one- to three-family homes, apartment buildings, utilities and commercial property — with each taxed under different formulas.

The intent was to lock in the percentage of total property-tax levy paid by each class at the 1981 level. That gave homeowners an advantage because historically they had received bigger breaks than other properties.

Ugh. Giving homeowners a ceiling on their tax burden certainly sounds like a nice idea.  There are three fundamental issues with deciding to do this sort of policy through the tax code.

  • Benefits the rich. The majority of tax benefits go to people who have the heaviest tax burden.  Seems natural, but if you try and imagine this as a spending program it’d be pretty bizarre.  New York gives the most money to people who already have the most money…wait, isn’t that the opposite of how this is supposed to work?
  • Advantages the savvy.  A closely related issue – not everyone takes advantages of tax benefits.  Generally because they’re extremely opaque and confusing, a fact the Bloomberg piece discusses.  The people who do take those benefits home are the ones who know about them and have good tax accountants. The people who need the money most are least likely to know about it or to fill out the forms properly.
  • Bad policies never die. If New York City had a line item in its budget giving out free money to rich homeowners it would last until the next Democratic primary.  It’d be a self-evidently insane policy priority in a city where nearly two million people live in poverty.  Yet because it’s embedded in the tax code this policy of “free money for rich people” just keeps chugging along.

If there’s anything the American tax code can teach us, it’s that our mistakes stick with us.  We should be very, very apprehensive about making policy through “narrow and targeted tax cuts”.

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