How Will New York City's Next Mayor Respond to Rising Income Inequality?

October 24th, 2013

In less than two weeks New Yorkers will head to the polls to replace Mayor Michael Bloomberg, who has hit his term limit. In the race, Bill de Blasio, the Democratic candidate, is the clear frontrunner over Republican Joe Lhota by 64 percent to 23 percent.

To voters, the campaign has centered on the economy and jobs, public education, and affordable housing—issues which all relate to major concerns over New York’s rising income inequality. In New York City income inequality is a huge concern. In fact, according to the Census Bureau, the income gap in the City is higher than in any other metropolitan region in the United States. On this issue, many New Yorkers have expressed a preference for de Blasio, and noted that during 12 years of Republican-turned-Independent Mayor Bloomberg, the city “paid too much attention to the rich and not enough to the poor.”

Mayor Bloomberg, who is a billionaire himself, has not responded to this issue with much sympathy.  “Wouldn’t it be great if we could get all the Russian billionaires to move here?” he said recently in his weekly radio interview, “You picture this income inequality measure, but if we could get every billionaire around the world to move here, it would be a godsend.”

His point was that billionaires spend a lot of money, contributing to local economic growth, and pay a lot in taxes to the City. Bloomberg’s press secretary, Marc LaVorgna, added that “other cities have much lower inequality levels,” but that New York is still a better place for the poor to live because the wealthy provide “us with more ability to help those who are working their way up the economic ladder.”

These comments betray a deep misunderstanding of the basic dynamics at play and the reasons for New Yorkers’ anger.

First of all, widening income inequality can hinder—not help—people climb up the economic ladder. For example, a recent paper uses census data in U.S. states to conclude that inequality is positively correlated with bankruptcies, which may be a result of those with less attempting to “catch up” with their neighbors and depleting savings or taking on excess debt in the process. Former Fed Chairman Alan Greenspan has said on widening income inequality: “this is not the type of thing which a democratic society—a capitalist democratic society—can really accept without addressing.”

Bloomberg’s and LaVorgna’s comments also betray an unwillingness to understand the basic reason New Yorkers and Americans are frustrated with this issue. New Yorkers are not frustrated because more rich people are moving to their city. They are frustrated because the city and the nation have not done enough to correct the underlying forces—beyond relocation of millionaires and billionaires—that have contributed to this income gap.

We can attribute some of rising income inequality in the last decade to new technologies, which have created huge opportunities for wealth for a few and rendered many traditional jobs obsolete. Global competition, the decline of unions, the slowdown in educational gains in America, and free trade have also contributed to the problem.

Another compelling argument is related to tax. The top income tax bracket in America is now about 30 to 50 percent below what it was under Eisenhower, Nixon and Ford—when the country was a great deal more equal. The top marginal income tax rate is a little below 35%–compared to 70% before Reagan took office.

The marginal tax rate, the rate on the last dollar earned, is not the same as the effective tax rate, which includes taxes on capital gains and pensions, and removes money on government payments, including Social Security. According to the IRS the effective federal income tax rate for the Fortune 400 fell from almost 30 percent in 1995 to just below 17 percent in 2007.

Yet the true effective rate is even lower than government statistics suggest because those figures fail to include income generated by tax avoidance strategies. In many of these strategies, the earner will borrow money against their assets and then never (or indefinitely push off) repay. Other executives—like Phil Knight of Nike, Jeffrey Immelt of GE, and James Gorman of Morgan Stanely—have left future earnings to children without paying estate tax by setting up Grantor Retained Annuity Trusts. And then there are the many complicated accounting strategies involving secrecy jurisdictions that also contribute to millions in evaded and avoided taxes.

Tax policy does not explain the whole story of rising income inequality in New York City or America. But it does provide an accessible remedy.  We aren’t going to slow the pace of technological change nor are we going to stem global competition. We probably won’t end free trade or refortify the unions. But we can close tax loopholes. Leaders in New York City and America need to understand these dynamics. We need leaders who do not read these statistics or respond to this frustration without an understanding of these underlying trends and their possible solutions.

Perhaps de Blasio is such a leader; perhaps not. We’ll let New Yorkers decide.

Written by Ann Hollingshead

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