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Commentary By Diana Furchtgott-Roth

New York and High Taxes Don’t Have to Go Hand-in-Hand

Economics Finance

A version of this article appeared on MarketWatch.

Feeling down in the dumps today? If you live or work in New York, you are not alone. 

Taxes are due April 18, and New Yorkers are paying far more in state and local taxes than most Americans: 12.7%. New York state residents have the seventh-highest federal tax burden in the country, at $10,500 per person.

The day after filing their taxes, April 19, New Yorkers go to the polls to select their parties’ presidential candidates. The experience may make them appreciate Republican Sen. Ted Cruz’s tax plan. His 10% flat tax is lower and simpler than those of other candidates.

Donald Trump, another Republican, has three tax brackets with a top rate of 25%, retaining many itemized deductions. The two Democratic candidates, Hillary Clinton and Sen. Bernie Sanders, raise the top rate to 44% and 52%, respectively, and increase the number of brackets without removing deductions.

The Cruz plan would encourage states to decrease their taxes by removing the deductibility of state taxes from federal income. (Disclosure: My husband, Harold Furchtgott-Roth, is an unpaid economic adviser to Ted Cruz.)

States have more freedom to raise their income taxes because they are deductible from income before federal tax is paid. That way, the federal government subsidizes the high tax rates in states such as New York and California by giving their residents a lower federal tax payment. That partly makes up for the high tax. If that tax break were removed, people would complain more, and states would not be so free to raise their taxes.

Some might say it’s only fair that New Yorkers pay higher taxes — after all, aren’t incomes in New York higher than in other states? But New York City is also a particularly expensive place to live — it costs 22% more than in an average U.S. city — so higher incomes are at least partly absorbed by higher living expenses.

It’s not just expensive to live in New York, it’s also an expensive place to die. In addition to the federal levy on estates, state estate and gift taxes are higher in New York than in almost all other states — about 3% to 16% of an estate’s value above the exemption amount of $3.1 million. Cruz would do away with the federal estate tax.

As we’ve all seen in trying to get our tax returns together, there are vast benefits to simplifying taxes by lowering the rate and removing deductions, as Cruz proposes. The Internal Revenue Service is never going to be entirely abolished — after all, we need some government office to collect those tax checks — but it could be radically restructured. With a lower, simpler, tax, it could be much smaller and less threatening. Simpler returns leave taxpayers with fewer errors and give the IRS less scope for finding those errors while auditing.

Tax increases harm the economy and discourage employers from hiring. This was shown by President Obama’s chair of the Council of Economic Advisers, Christina Romer, in a paper coauthored with her husband, David Romer, in 2010, written when both were professors of economics at the University of California at Berkeley.

The Romers conclude: “Our results indicate that tax changes have very large effects on output. Our baseline specification implies that an exogenous tax increase of 1% of GDP lowers real GDP by almost 3%.”

Arizona State University Nobel Prize-winning economist Edward Prescott, looking at tax rates over major industrialized countries, has shown in a paper for the Federal Reserve Bank of Minneapolis that the higher the levels of taxes, the lower the hours of work. In highly taxed France, for example, people on average worked only three-fourths of the American workweek. In the early 1970s, when American taxes were higher, the French worked more than Americans. Prescott’s results also hold for countries as diverse as Japan, Chile and Italy.

Diana Furchtgott-Roth is a senior fellow and director of Economics21 at the Manhattan Institute. Follow her on Twitter here.

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