The Fiscal Cliff — Summary
Sandra has run the projection seventeen times. She arrives at the same place every time. Income tax receipts flattening despite nominal wage growth, because the growth is concentrated in a fraction of earners employing the most sophisticated minimization strategies. Corporate tax declining as the most profitable companies optimize their jurisdictional positions. Property tax following commercial real estate down in a market that is not in a cyclical slump but a structural reorganization. Safety net requirements expanding. On her windowsill, a cactus she has kept alive for nine years without it ever flowering. She considers this a form of solidarity.
State and local governments fund their operations primarily through three revenue streams, each built to capture value from the mid-twentieth century economy. The income tax was designed for an economy where income was distributed broadly enough that taxing a significant fraction of it produced meaningful revenue — calibrated for an economy where the top decile earned roughly twice what the median earner made. When the top decile earns ten times the median, the middle is the tax base and the top is where minimization returns are high enough to justify the investment. The corporate tax assumed that profitable corporations operated primarily within the taxing jurisdiction — a reasonable assumption when a manufacturer who sold in Ohio employed in Ohio. The corporation that designs in California, manufactures in Vietnam, books IP in Ireland, and sells worldwide has no simple relationship between economic activity and geographic location. The property tax tracked commercial real estate values, which tracked economic activity. When activity concentrates in fewer jurisdictions and physical presence requirements decline, commercial values diverge from economic activity in ways the tax was not designed to handle.
Each of the three foundations is shifting structurally rather than cyclically. They would be manageable if they shifted independently. They are not shifting independently. They are three measurements of the same underlying economic activity. When the activity restructures, all three measurements shift in the same direction. And as the revenue base contracts, the claims on it expand — the automation that reduces corporate payroll also reduces the income-tax-paying workforce and expands the population requiring assistance. These effects are mechanically linked.
The structural response is legible: tax wealth directly, where the income and corporate and property optimization has been most successful. The wealth tax faces a political problem that is not incidental to its economics. Wealth concentration produces political influence, which is deployed — through legal mechanisms fully documented in the academic literature — to protect the concentration. The mechanisms are not primarily corrupt in the legal sense. They are the ordinary functioning of a political system that processes influence the way an economic system processes efficiency. The wealth tax’s proponents have proposed it repeatedly. Its opponents have defeated it repeatedly. The pattern is not random.
Sandra has submitted the projection to the committee, the commission, the governor’s office twice, and the relevant legislative subcommittee. The response from every level has been: noted. She suspects this means: we see what you are describing, we understand that it is structural rather than cyclical, and we are unable to change course because the specific change required would impose costs on the constituency whose support we need to remain in the position from which we could impose it.
The projection is the same number it was a year ago.
She waters the cactus. Once a month. It has never flowered. It survives on what it gets. She is not sure the same can be said for the systems she serves, but the cactus does not know this, and surviving on what you get, for as long as the conditions hold, is not nothing.