Public Finance Roundup: What Happens When the Richest Move to Laputa?

Learn about classic lit via STUMP while "enjoying" fiscal failure

Jan 17, 2021

Howdy guys – before I do this, just warning you that I will be making a couple of posts today and a couple tomorrow. This doesn’t often happen, but I have some items that will go really stale if I don’t post soon… and I want to spend the rest of the week after these 4 posts digging into COVID/total mortality data for the U.S.

For the first of these 4 posts, let’s dig into public finance!

Remembering Rich People Can Move Anywhere

This has been a theme for me for years with Taxing Tuesday: the truly rich can up stakes and leave. Merely affluent may also move, but there is more “stickiness” with them. At some point, though, they will also go away.

(Btw, my post title refers to Laputa from Gulliver’s Travels, a flying island… which other works of lit have referenced. Douglas Adams had a flying party that becomes grounded, for example, in one of the Hitchhikers Guide to the Galaxy novels.)

Democratic Underground: What Happens When the 1% Go Remote

It doesn’t take very many ultra-wealthy Americans changing their address to wreak havoc on cities’ finances.
The 1% are on the move. Tom Brady and Gisele Bundchen bought a $17 million teardown on Miami Beach’s ultra-exclusive Indian Creek island. Jared Kushner and Ivanka Trump, who are said to have plunked down $30 million for a lot, may be their neighbors. Recently it emerged that hedge fund Elliott Management Corp. is moving its Manhattan headquarters to South Florida, and that private equity giant Blackstone Group Inc. will open an office there. Goldman Sachs Group Inc. is reportedly considering relocating part of its asset management operations to the region, too. It’s not just happening on the East Coast. In the last few months, the venture capitalists David Blumberg and Keith Rabois decamped from the San Francisco Bay Area to Miami.
…..
Some residents of pricey cities like New York, L.A. and San Francisco might say good riddance to the uber-rich whom they blame for growing unaffordability and inequality in their cities. But their cities will pay a literal price for their departures. It doesn’t take very many one-percenters changing their address to wreak havoc on cities’ finances.
When the billionaire hedge funder David Tepper left New Jersey for Miami Beach in 2015, he left a a crater in New Jersey’s budget that experts estimate was upwards of $100 million annually. (Interestingly enough, Tepper recently moved back home to the Garden State.) A whopping 80% of New York City’s income tax revenue, according to one estimate, comes from the 17% of its residents who earn more than $100,000 per year. If just 5% of those folks decided to move away, it would cost the city almost one billion ($933 million) in lost tax revenue.

Okay, the original article is actually at Bloomberg, written by Richard Florida who loves yammering on about vibrant urban areas that attract the high-earning intelligentsia (or something). Some of his books haven’t aged well.

More from Richard Florida:

While the pandemic has helped to accelerate remote work and potentially the geographic flexibility it allows, such migrations were more likely set in motion by Trump’s changes to the tax code: The so-called SALT deduction capped the amount of state and local taxes that can be deducted from federal taxes.
Until recently, high-tax cities had a fighting chance against their lower-tax rivals. That is why so many blue-state politicians have called for getting rid of the Trump-era caps and restoring the ability to deduct state and local taxes. Some progressive economists have rightly countered that enabling the wealthiest Americans to write off their state and local tax payments is highly regressive, amounting to a tax break of $100 billion or more a year that flows mainly to the very rich. But eliminating those write-offs has created a race to the bottom that is already devastating the budgets of expensive coastal cities. Others recommend replacing the SALT deduction with a 15% credit for state and local taxes. Given the pressure from Democrats in impacted cities, this is something that the Biden-Harris administration may have to revisit.

Again, I look to the SALT cap going away with a Democratic Congress and White House…. and my federal taxes going up anyway. While really rich people know how to optimize their taxes, there’s an activation energy and… you know what?

I’m not going to try to educate policy-setters here. I’ve done enough emotional work.

There are many reasons to oppose handing over tax subsidies to the ultra-wealthy, but the effect of new remote technology on state and local taxes requires some serious scrutiny by all levels of government. As more Americans, especially the 1%, have flexibility about where they work, city and state governments will need to develop new revenue models that account for the locations of both the people and their businesses. When an advantaged class can live thousands of miles away from where they work and own assets, it deprives cities of a vital source of revenue.

There is so much here to unpack, I’m just going to take another drag on my wine and laugh.

My kids do fetch me wine. Parenting win.

Here is an idea: DON’T BECOME SO DEPENDENT ON A SMALL PROPORTION OF YOUR POPULACE.

This is pure risk management strategy. You may have heard the axiom “Don’t put all your eggs in one basket.” Some say, “Just keep your eye on that basket.” And some say “Hey, where did that basket go?”

So here is the amusing part to me. I came across this item via reddit and DU, which have somewhat different users who comment.

Here are some comments from the /r/Economics subreddit:

ThePandaRider
It’s not just the 1%, some companies have went ahead and went entirely remote but most haven’t committed to it yet. Going forward I would expect more companies to do analysis on the performance of their workers in the second half of 2020 and let their employees transition to remote roles, which will in turn lead to more people leaving high cost of living/high tax cities.
Cities will need to adapt to the new paradigm where companies will no longer need to have an office in a city to get access to the city’s talent pool. Hopefully the transition will mostly be smooth, but some spending cuts are likely.
…..
Supply goes up, demand goes down, prices somehow stay up.
The top end of any market leaving might be a jolt short term, long term it removes inequality and opens up the market for other players. Wealth knows this, it is how they took markets themselves.
The “1%” collect the money, they do spend, but not enough to keep an economy afloat. So relying on a system that relies on wealth and the 1% is a flawed system and it should break.
While wealth dollars go farther due to them collecting over paying interest, and poorer people pay more interest and their dollars contract, the bigger problem is in the lower/middle class. What is more of a problem is long term stagnation and draining purchasing power in the lower/middle, that affects all classes and market opportunities for all.

And here are a few DU comments:

Hermit-the-Prog
11. Yeah, that was a pretty jarring leap from talking about 1 percenters to “over $100k”
How much of NYC’s income tax revenue comes from those 1%ers the article started with?
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intrepidity
8. Eh. They’re a bunch of tax cheats anyway
Good riddance. We’ll survive just fine.
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StClone
9. Point is this wealth should never have been allowed to accumulated in so few hands
If spread among thousands of people there wouldn’t be a problem.

(Yes, I know, I bet you didn’t know Democratic Underground was still around)

I think we can see which people have barely thought about these issues.

MAYBE POLICY MAKERS WILL THINK ABOUT IT.

New York City (and state): Lots of problems – hey! Free money!

Manhattan Institute: Trimming New York’s Budget Bloat: Making City Government Leaner and More Affordable

New York City faces both short- and long-term fiscal concerns as a result of the Covid-19 pandemic. The shortterm issue—keeping the city’s budget in balance despite plummeting employment and the crippling of major industries such as tourism and the performing arts—has proven manageable in the current fiscal year, through the measures the city typically takes in recessions. These include a hiring freeze, deferring expenses to future years, and refinancing debt. A projected deficit remains in the upcoming fiscal year, beginning July 1, 2021, but its size is less daunting than originally forecast, and the city has closed comparable deficits in past recessions.
The long-term problem for the city is that continuing expenditures—particularly on pay and benefits for current employees, as well as pensions and other post-employment benefits for retirees—have risen much faster than price inflation or the growth of the underlying economy. As a result, taxes have grown as a share of the personal income of the city’s residents. The city has, thus far, been able to afford these outsized expenditures principally because property tax collections have continually increased, as scarce office space and apartment buildings become more valuable. Because taxes are based on property values, which in turn are based on achievable rents and sales prices, property taxes can rise rapidly even while tax rates are unchanged. The city has evolved a high-productivity economy whose businesses and workers are able to afford the high real estate costs induced by restrictive land use controls.

There is more, but obviously pensions and retirement promises, whether to the broader taxpaying base (in the form of Social Security-type programs) or just to public employees, are creating a lot of fiscal stress.

Even if New York City and other places were fully-funding their promises, there would be a problem. Check out this data story on the aging of world populations to get a taste. Eyes should be on Japan, with the oldest population in the world: right now, over 29% of Japan’s population is over age 65.

To give a local comparison, only 17% of the U.S. population is over 65.

Japan’s aging is driven not only by their very high longevity – they are the country with the highest life expectancy (Hong Kong doesn’t count) at almost 85 years – but also their super-low birthrate: 1.4 Total Fertilty Rate per woman. The Japanese population has started to shrink as a result.

So NYC has to consider their revenue going away, but they also have de Blasio’s going away to look forward to. Which means the race for NYC mayor is on!

The Hill @thehill

.@AndrewYang: "As mayor, we will launch the largest basic income program in the history of the country." hill.cm/nz3zpKA

Just sitting here — there’s a revenue issue for NYC and you want to boost their spending? Dear lord, you’re an idiot, Yang.

I assume he’s going to say they’ll ask the federal government to do it. They’re not going to have a UBI program, even if he does manage to get elected money. He has to worry about just paying for NYC pensions for those who actually worked for the city.

Euro Bonds

WSJ: Europe’s Covid-19 Bond Issuance Addressed Fiscal Shortcomings

The eurozone has always had a fundamental weakness compared with the U.S. when dealing with financial and economic crises: While its 19 countries share a currency and interest-rate policy, they have no common tax-raising or spending power.
In 2020, the European Union took a big step toward correcting that deficiency by starting to issue bonds on behalf of all member countries, known as common bonds. Beginning in 2021, some common bonds will be repaid through taxes raised by the EU.

That seems like a way to spur more countries desiring to leave the EU, if the EU starts with a direct taxing authority.

This fiscal role for the EU is meant to be one-time, but policy made in the teeth of a crisis — in this case, the coronavirus pandemic — often sticks. Many investors and analysts say that a central ability to make taxation and spending decisions at the EU level will become permanent.
Europe’s leaders signed two support packages to help the 19 eurozone members and eight other countries that don’t use the euro cope with the Covid-19 crisis.
Almost 40 billion euros, equivalent to almost $49 billion, of bonds were sold in 2020, and an additional 210 billion euros of bonds are expected to be sold in 2021, according to Pictet Wealth Management. Total funding from bond sales for the packages is expected to total 850 billion euros.
The EU has lent money to member countries before, through the European Financial Stabilization Mechanism, for example. But this time one of the packages, a 750 billion euro recovery fund, includes as much as 312.5 billion euros in grants that member countries won’t have to repay. Instead, they will be covered by taxes raised at the EU level.
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Almost 40 billion euros in common EU bonds have already been sold since late October under a 100 billion euro program that was quickly agreed upon to help countries fund efforts to keep people employed during Covid-19 shutdowns. That program, known as Support to mitigate Unemployment Risks in an Emergency, or SURE, lends money to the countries, which must repay the funds from their own tax bases. A benefit is that the common bonds are triple-A rated and cost less than what some weaker countries, such as Italy, have to pay to borrow.
The 10-year SURE bond yields minus 0.42%, higher than Germany’s minus 0.57%, but less than Italy’s 0.54%.
…..
The bonds have faced a crowded market. Issuance in euros from governments and supranational bodies such as the EU has increased in 2020 to more than 630 billion euros, compared with more than 330 billion euros in 2019 and slightly less than that in 2018, according to Deutsche Bank.
One reason why huge government borrowing is being so easily digested by investors is that the European Central Bank is buying a lot of it. ECB purchases are expected to exceed the amount of new borrowing done by eurozone governments. The amount of bonds available for other investors to buy is forecast to shrink by nearly 450 billion euros, according to Bank of America. That would be the biggest contraction since 2016.

Yikes. Central bank buying of sovereign debt is asking for all sorts of bad things happening. Oh yay.

STUMP - Meep on public finance, pensions, mortality and more

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