Wednesday, April 30, 2014

When Can Liberal Cities Tax the 1% Without Fear of Flight?

The NY Times reports that a subset of liberal cities (think of Seattle and NYC) are launching a set of progressive and expensive public policies.  Consider a spatial model of migration in which the U.S is a featureless plane such that every city's amenities are the same and the rich solely care about their own wages and rents paid.   In this model as the liberal mayor (think of Big Bill De Blasio) raises taxes the rich respond by selling their real estate and moving.  In this case, the property tax base will shrink in the liberal cities and the mayor will be frustrated that he can't finance his progressive agenda (unless the Feds heavily subsidize it).
This pessimistic logic may fail for 3 reasons;

1.  Cities are not identical.  The most beautiful cities (think of San Fran and NYC) are the liberal cities.  Whether liberal policies caused this beauty is worth some research.   An alternative theory is that liberals "capture" beautiful coastal places.  Randy Walsh and I have a new paper on this.  If the rich demand beauty then the liberal beautiful cities may be able to raises taxes without losing the rich through migration.

2.  Some of the rich may have a taste for redistribution and be willing to participate and live in a city that launches progressive experiments.

3.  The experiments themselves may make the city a more desirable place to live in the medium term.  The liberal innovative mayors could be right that their policies both are fair and contribute to long term urban growth by building up the next generation of human capital.

Note how the theme of urban political economy lurks here.   For young economists looking for new research topics, consider this one!