Tax Incidence and the MTA

So rather than require the retired to pay the same taxes on the same income as everyone else (it is their debts, Medicaid costs and pensions that are destroying public services after all), the senior citizens in the New York State Legislature chose to raise New York’s already high taxes on wages to bail out the MTA. But, according to the legislature and councilmember Lew Fidler, who first came up with the idea, businesses will pay the 0.34% payroll tax, not workers. The New York City Partnership, which represents large businesses, was in favor out of the goodness of its heart. Or was it?

For the benefit of the hack attorneys who are running our governments into the ground, I have braved the dust to pull out Public Finance In Theory and Practice, a textbook from my student past. Tax levies, the book (and common sense) informs us, impose “burdens which the individual taxpayer will try to avoid or pass onto others. To determine who pays, we must thus look beyond the tax statutes and the pattern of statutory incidence, i.e., beyond those on whom the legal liability rests.” So who will be paying the MTA payroll tax? I’ll bet it isn’t those who ran up the debts and retiree obligations it will be going to pay for.

There are two considerations, according to the textbook.

“First, it must be recognized that in the end, the entire tax burden must be borne by individuals. Though taxes may be collected from business firms, their ultimate burden must be traced to individual households in their capacity as owners of the firms, as employees, or as customers of their products.”

Politicians in general, and Democrats in particular, love to tax firms, because then the firms can be blamed for whatever loss of well being is required, rather than the beneficiaries of the tax dollars. Who actually gets stuck with the bill depends on power in the marketplace, supply and demand. At present owners of the firms subject to the MTA payroll cannot be taxed because they get almost no income. Corporate profits, real or imagined, are siphoned off to executive bonuses. And consumers cannot pay the tax, because the days of funding their purchases in excess of their incomes are over, and they are more careful spending money they have earned than money they have borrowed and aren’t going to pay back.

It is, in fact, ordinary workers who will be paying the MTA payroll tax. Their wages have been lagging behind inflation, aside from those at the top, for 35 years, and the lag has accelerated since the U.S. has been bankrupted by the White Collar Riot of the past decade or so. More recently in the recession, most workers have had their pay frozen or cut, falling behind inflation even when there isn’t any. So the New York City Partnership knows its members can simply shift that 0.34% payroll tax increase to their employees by cutting, freezing, or retraining their pay. With few other jobs available, they can and will say take it or leave it. In the government, on the other hand, laws and contracts and arbitrators guarantee that wages go up no matter what. So the cost of the 0.34% in the public sector will also be shifted to private sector workers, particularly the young and working poor, in the form of higher taxes and service cuts. They’ll be paying twice.

So what would I advise younger generations who are being stuck with a higher tax bill and a degraded transit system by Generation Greed? The second consideration in the textbook is that “individuals, as well as firms, may adjust their sales and purchases, thus affecting the position of others.” And one place to adjust those sales and purchases is real estate.

It is older generations who tend to be sellers of houses, and owners of multi-family properties. In the latter case, it is the richer members of older generations. My advice is demand huge rent decreases and double up, move away, do anything required if they are not granted. And thus make the landlord pay for all the additional taxes, fare increases, etc. in the form of lower rent. And if the landlord goes bankrupt, make the lender or bondholder pay.

Owner-occupied property? Before buying a home in NYC, bear in mind that as a result of the deal to allow NYC teachers to retire at age 55 instead of 62, the NYC public schools will be continuously cutting services and the pay and benefits of new teachers for at least a decade and perhaps two. Your children’s education has already been taken away from you. I should have known this before I bought a house and settled into NYC in 1994, and before the city schools were gutted by the diversion of money elsewhere in the mid-1990s. Don’t buy a house or condo in NYC if you will be unable to afford private schools. If empty nesters are willing to outbid you, it’s time to leave the New York metropolitan area. You’ve been warned.

Given everything that Generation Greed has promised itself in New York, it’s going to take some pretty cheap real estate to make the place barely livable. Don’t be a victim because of a dream. Your dreams have already been securitized and sold. If those under 40 had any insights and any balls, the general strikes would have already begun. But they are coming. The usual solution — put off the problem and have the higher bill passed to those under 25 — will just make the reaction larger when it comes. Hey kids, don’t blame me, because I did all I could to stop it.