A New Justification for Cutting the Income Taxes of High-Income People

August 5, 2010

Six congressional Democrats from New York are pushing a tax cut for people who live in high-income areas. The idea is to index everyone's income tax brackets to the cost of living, giving a big tax break to everyone who lives in the nation's most expensive areas.

"In Westchester County, when the median cost of a home is $666,000, with $200,000 income you're not feeling very rich," explained Rep. Nita Lowey.

Amusingly, the group calls itself the Tax Equity Caucus. Rep. Steve Israel said the new caucus would focus on language similar to a bill by introduced by Rep. Jerrold Nadler last year (HR 1943) that would require regional cost-of-living adjustments for tax rates. CQ explained how the law might affect the expiration of the Bush-era tax cuts at the end of this year:

The proposed $200,000 ceiling for extension of the George W. Bush administration tax cuts, for example, could be multiplied by a factor reflecting how the cost of living in a region, county or city compares with the national average.

Rep. Israel's quotation, "A six figure income in Islip is not the same thing as a six figure income in Idaho," reminded me of the unemployment office scene in the Albert Brooks movie, Lost in America (1985).

In the film, advertising executive Brooks and his wife have been working $100,000 jobs in New York for several years. They've saved up such a nest egg that they decide to quit, live on the interest, and go on a cross-country road trip, kind of a yuppie version of the movie Easy Rider — in a Winnebago instead of on Harleys.

At a hotel in Vegas, Brooks's wife can't sleep, so she wanders down to the casino floor, and by morning she has blown their entire nest egg. The couple is so broke that when they run out of gas in a small Nevada town, they have to stop and look for work. Brooks walks into the unemployment office looking for a high-paying job.

The real-life economic lesson is that high-paying jobs are clustered in major metropolitan areas. Productive people compete for these jobs and bid up the price of housing to live there. Meanwhile, they create a culturally rich lifestyle that attracts more people, and so the city grows. But sorry, no, those same people can't pretend that their six-figure salaries ought to be taxed as if they were the equivalent of smaller salaries elsewhere. They're not.


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