How taxes might reshape America

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In his essay on "How the Crash Will Reshape America," Richard Florida argues that the financial crisis will ultimately prove beneficial to New York and other "creative class" meccas. Megan has pushed back against Florida's optimism, suggesting that the credit bubble may well have been the key driver of New York's renaissance.

But while digesting the news from President Obama's new budget, I wonder about the long-run effect of changes in the tax code. We don't know very much about what exactly the tax code will look like two or three years hence, but we do have a sense of the direction the Obama White House is heading. And we also know that the federal tax code has a non-trivial impact on where firms choose to locate, not to mention households.

The state and local tax deduction, for example, eases the burden on high-income families living in high-tax states. One wonders about the extent to which this has facilitated the clustering Florida describes in his essay.

Thirty years ago, educational attainment was spread relatively uniformly throughout the country, but that's no longer the case. Cities like Seattle, San Francisco, Austin, Raleigh, and Boston now have two or three times the concentration of college graduates of Akron or Buffalo. Among people with postgraduate degrees, the disparities are wider still. The geographic sorting of people by ability and educational attainment, on this scale, is unprecedented.

As far as I can tell, President Obama has no interest in curbing the state and local tax deduction. This makes perfect sense given that it benefits one of his core constituencies, namely affluent suburbanites living in high-tax states. Remember that Obama narrowly won voters earning over $200,000. That said, the president's budget proposal limits deductions for mortgage interest and charitable donations for those earning more than $250,000, a wise move. This approach is a heck of a lot less painful for upper-middle-class taxpayers than leaving the AMT in place. Yet it will make clusters like Silicon Valley even less attractive for families with children, or so argues Obama critic Rich Karlgaard of Forbes. In a post dramatically titled "The Coming Blue-State Collapse," he offers an interesting scenario.

A reasonable conclusion is that America could see a huge outflow of educated, upper-middle-class families from the high-tax urban blue states to more congenial places. (I wrote about this in my 2004 book, Life 2.0, but I'm convinced today's circumstances will accelerate this trend.) If I were investing in real estate, I would look at Washington state (no state income taxes but a vibrant economy and educated populace), both around Seattle and Tacoma and in the east around Spokane; and Texas (no state income tax), particularly in the high-tech areas of Dallas and Austin.

To be sure, most people aren't that tax-sensitive. But at the margin, this kind of thing matters -- and that means the difference between a small amount of clustering and a cascade. Joel Kotkin has noted how firms that start in expensive, high-cost, high-tax clusters will often decamp for cheaper venues when they expand.

Though New York city is politically left-of-center, it has been, in a strange sense, the beneficiary of the sharp increase in income inequality. A more egalitarian America would presumably feature a smoother distribution of talent across the country, as many of the amenities that make New York attractive are "luxury goods" subsidized by the outsized wealth of a small minority. Indirectly, this could increase the quality of life in metropolitan areas across the country. Regions that have experienced brain drain might experience brain gain, and vice versa. (I prefer to think in terms of a changing pattern of brain circulation.)

Pace Obama's harshest critics, this might be a good thing. But the irony is that this shift would prove most beneficial to regions that aren't particularly fond of the Democratic agenda. Perhaps this is a sign of the president's postpartisan sensibilities.

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Reihan Salam is a policy advisor at Economics 21, a columnist for The Daily, and a blogger for National Review Online.

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