Detroit Taxes and the Laffer Curve

by on July 25, 2013 at 7:28 am in Uncategorized | Permalink

Detroit’s Emergency Manager Kevyn Orr has issued a clearly written report that outlines Detroit’s situation and its improvement plan. Here are a few highlights on taxes:

  • [The] per capita tax burden on City residents is the highest in Michigan. This tax burden is particularly severe because it is imposed on a population that has relatively low levels of per capita income.
  • The City’s income tax… is the highest in Michigan.
  • Detroit residents pay the highest total property tax rates (inclusive of property taxes paid to all overlapping jurisdictions; e.g., the City, the State, Wayne County) of those paid by residents of Michigan cities having a population over 50,000.
  • Detroit is the only city in Michigan that levies an excise tax on utility users (at a rate of 5%).

Detroit Taxes

Detroit taxes are high not only relative to per-capita income but also, of course, relative to the delivery of services. Forty percent of Detroit’s street lights aren’t working, the violent crime rate is the highest in the country (for cities over 200,000) and fire and police services are slow and outdated. Although taxes are high they often aren’t paid. Only 53% of city property owners, for example, paid their 2011 property taxes.

As the report notes, Detroit is probably on the wrong end of the Laffer curve–lower rates would increase revenues in the long run.

Hat tip: Brian Blase.

Z July 25, 2013 at 7:37 am

The path of debt is not new. The Hapsburg Empire followed a similar path during and after the 30 Years War. The Brits suffered similarly after the 100 Years War. The absolute limit on individual debt is much lower, relative to the ability to pay than it is for the state. The reason is the state has a monopoly of force and often the ability to coin. Detroit politicians were able to create a new, off the books type of debt to buy votes. That’s pension and benefit plans. Inevitably, they busted it out like gangsters with their hooks in a retail store.

If you look around, no matter where you live, government services are contracting. The term “anarcho-tyranny” will become increasingly common. The state is no longer able or willing to do that which it is supposed to do. Instead it aims for the low hanging fruit that looks more like harassment than service. I bet Detroit cops have issued more seat belt violations than property crime arrests. The former is easy, the latter is difficult.

greg July 25, 2013 at 6:47 pm

“If you look around, no matter where you live, government services are contracting.”

Grover Norquist’s vision of a government small enough to drown in a bathtub coming true.

Peter Schaeffer July 26, 2013 at 2:39 pm

Z, greg,

“If you look around, no matter where you live, government services are contracting”

Don’t trouble yourself with the facts, but government spending (all levels) is at historic highs having risen 5-6% of GDP just since 2000. From 2009 to 2011, government spending surpassed (as a percent of GDP) the 1945 WWII peak. In 2012, spending was only 0.3% below the WWII high.

Perhaps government services are contracting. Not for a lack of money.

“Grover Norquist’s vision of a government small enough to drown in a bathtub coming true”

Statements like this don’t exist in the reality based community.

Jason August 4, 2013 at 12:18 am

That’s just rubbish, here’s the real data

http://www.usgovernmentspending.com/us_20th_century_chart.html

Jay July 25, 2013 at 7:40 am

Are Detroit’s taxes less than 70%? Because that is what the left-wingers say is the optimal tax rate.

(Not That) Bill O'Reilly July 25, 2013 at 8:21 am

It would not appear to be the case. But I imagine Ezra Klein et al. would blame tax competition rather than the Laffer Curve per se in explaining Detroit’s tax problems.

The solution, of course, is to raise federal tax rates to reduce the marginal incentive for interjurisdiction tax competition. Or something.

mavery July 25, 2013 at 9:54 am

National revenue-maximizing marginal tax rate for the top income bracket? Possibly…. But why do you equate “revenue-maximizing” with “optimal”? It’s a very obtuse view.

mike July 25, 2013 at 10:22 am

“But why do you equate “revenue-maximizing” with “optimal”?”

It’s optimal from the perspective of the government as a self-interested actor…

jeff fisher July 25, 2013 at 10:07 am

What revenue maximizing tax rate does a claim that Detroit is on the wrong side of it assert?

Is that “tax burden” state only or state + federal?

1207/15261 = 7.9%

Which seems like state only, except that on per-capita income of $15000 federal taxes will be only a few percent, so maybe it doesn’t matter.

A revenue maximizing tax rate of less than 15% is being asserted. Certainly no wealthy nations approach that (excepting perhaps some resource-extraction funded governments). That is, as I recall, vaguely the overall tax rates seen in the undeveloped world.

Really I think people ought to go see a place like Detroit before accepting the idea that people are moving out of it because of tax rates, hell just look at the pictures. Its completely unbelievable that these small tax differences (a few percent of income at most) are more important than… everything else about the place.

Cliff July 25, 2013 at 12:15 pm

$500 is a lot of money when you only make $15,000 a year. Isn’t that fundamental for liberals?

jkgah July 25, 2013 at 12:25 pm

Have you examined the regressive burdens of environmental regulation (e.g., mandates that utilities buy and charge more expensive sources)? Labor & employment regulation? Either concern for the poor is not fundamental or they’re wilfully ignorant.

Having said that, what came first: theslow-moving Detroit implosion or higher marginal taxes?

Peter H July 25, 2013 at 11:50 pm

You’re confusing average and marginal. The average Detroit resident pays nearly no taxes, city, state or federal. Because the average Detroit resident is poor. But those who do have sufficient income to be taxed face extremely high taxes. This makes for a high-ish average tax burden, and a very high tax burden for middle to upper income individuals, which pushes them to the lower tax suburbs.

Peter H July 25, 2013 at 1:48 pm

When combined with state and federal taxes? Probably yes.

wiki July 25, 2013 at 7:47 am

This pattern is quite typical of many underdeveloped nations. High tax rates, lots of taxes, poor enforcement on the very poor or the very rich and well-connected, combined with policies that tend to drive away private investors and penalize the middle class and rising commercial bourgeoisie.

Anon. July 25, 2013 at 8:50 am

That’s Greece in a nutshell.

Hazel Meade July 25, 2013 at 10:32 am

I want to know when we are allowed to stop using the word “bourgeoisie”.

Can’t we some up with something with fewer Marxist overtones? Rising commercial merchant class maybe?

Tarrou July 25, 2013 at 11:13 am

I like “bourgeoisie”. I’m taking it back.

Hazel Meade July 25, 2013 at 12:06 pm

I like the term ‘libertois’ or maybe ‘libertoisie’

MD July 25, 2013 at 11:51 am

Talking about a “merchant class” seems pretty Marxist to me, comrade.

Go Kings, Go July 25, 2013 at 12:30 pm

…when we are allowed….can’t we…”

I reject your hegemonic “we”. I use, or do not use, the word “bourgeoisie”, as I choose. You are welcome to do what you wanna do.

Dan in Philly July 25, 2013 at 8:05 am

As the country has become more and more mobile, the ability to escape taxes, especially city taxes, has increased. If driverless cars and 3D printing become reality this will only increase the phenomenon. The problem isn’t so much that Detroit is over-taxed, the problem is their government/tax structure is outdated, more suited to the world in which is was birthed than the world in which it lives.

When something is dying, the humane thing sometimes is to kill it quickly, so that whatever works better can come take its place. Detroit is dead, long live Detroit!

F. Lynx Pardinus July 25, 2013 at 8:15 am

“As the country has become more and more mobile”

I’m not sure that’s the case: http://conversableeconomist.blogspot.com/2012/12/rock-bottom-us-mobility-rates.html

Rahul July 25, 2013 at 8:49 am

Are you arguing that the ability of people to flee from somewhere like Detroit is a bad thing?

F. Lynx Pardinus July 25, 2013 at 8:52 am

“Are you arguing that the ability of people to flee from somewhere like Detroit is a bad thing?” No.

Dan in Philly July 25, 2013 at 10:58 am

Neither good nor bad, or if you like both good and bad, depending on which side you root for. It is just a thing. A reality which cities and states must face or die.

Rahul July 25, 2013 at 11:45 am

I just think people anthropomorpize cities way too often and sometimes hold the survival of a city as something sacred in itself.

Urso July 25, 2013 at 12:48 pm

Of course when people refer to a city in this way it’s a sort of metonymy, isn’t it? Nobody is literally talking about the dirt underfoot. They’re talking about the people and the way of life.

The culture that is ___

RZ0 July 25, 2013 at 8:46 am

Replace “Detroit” with “New York,” or “Chicago” and the tax story doesn’t change. The outcome does.

Detroit’s problems stem from its corporate fathers (automakers) systematically sending jobs out of their own city. You can argue unions forced them to do it, but the loss of jobs directly led to the loss of population.

The fact that Detroit’s problems are unique and of unprecedented scale in the U.S. should tell us that there is very little that happened there that is likely to be repeated anywhere else soon. If this were not the case, the muni market would be behaving quite a bit differently these days.

mofo. July 25, 2013 at 8:54 am

Thats a cool story, do you have any facts to back that up?

I think the growth of the suburbs of Detroit sort of refutes your argument, dont you think? The jobs and people are still there, they just moved out of Detroit and into the nearby suburbs.

Mark July 25, 2013 at 9:20 am

My family’s journey: Moved to Detroit because of a good union job. Saved enough to buy a house in the suburbs. My father for decades had a very long commute to get to work, but stayed at his job and together with my mother saved enough in the 401(k) to retire comfortably.

Reasons for moving: cheap land, probably better schools (easy to say in hindsight but I suspect was not clear at the time), and getting/maintaining cars was easier in that environment than public transit. Racial animus was real and bidirectional, but I think it was always the family plan to buy a house, and back then it was just cheaper to move out to the outer suburbs. Distrust between the city and the suburbs was just one reason that Detroit emptied out, leaving a hollow core that eventually started to bring down the inner suburbs.

Very easy to be conservative and/or libertarian when the image of liberals were the politicians leading Detroit and Wayne county. Easy for me to be more moderate now because I didn’t have to navigate that environment, and I’ve come to know more liberals and conservatives from diverse backgrounds. It’s very easy to pick on Detroit, and it’s funny to me now to see national punditry on both sides making general claims. 45 years of interacting bad decisions by city and suburbs, citizens and corporations, have led to this reckoning.

Urso July 25, 2013 at 11:21 am

It must be a curious thing, for Detroit natives, to see a real place they actually lived treated, on a national stage, as if it were just a metaphor.

Eric S. July 25, 2013 at 11:41 am

Try living in Chicago and watching Drudge report on gang shootings everyday.

John Thacker July 25, 2013 at 8:58 am

Actually, the property tax rate story does change. But certainly that’s partially because Detroit’s rates are so high because property values are so low, and half of people don’t pay them. (There is an oddity of NYC having an oddity of having very high apartment tax rates but low owner occupied housing tax rates, which is a mistake.)

John Thacker July 25, 2013 at 9:00 am

But overall, most cities have much lower property tax rates than Detroit, because with higher property values you get more revenue on lower rates. (And the arbitrariness of assessments is why many property owners in different cities only care about what happens to their total amount of property tax and how they are assessed compared to comparable neighbors, and not about the exact rate.)

jeff fisher July 25, 2013 at 9:48 am

Detroit’s problems certainly aren’t unique.

Look up Gary, Indiana.

There are probably other examples as well.

Joe in Morgantown July 25, 2013 at 10:37 am

Youngstown and Toledo in Ohio would be other examples.

Both have the same story as Detroit: industrial decline due to a combination of management decisions, foreign competition and union burdens; local government that was cocky, incompetent and expensive.

Youngstown (steel) has shrunk from 170,002 to 65,405. Toledo (autos) has not shrunk nearly so much.

The stories aren’t quite as depressing as Detroit. Youngstown seems to find good news to put on the city web page. http://www.cityofyoungstownoh.com/

JWatts July 25, 2013 at 6:44 pm

“The Detroit News revealed that Detroit in 2011 had around twice as many municipal employees per capita as cities with comparable populations. The city water and sewer department employed a “horseshoer” even though it keeps no horses.”

That’s an indication that Detroit’s problems actually are specific to Detroit.

George Doehner July 25, 2013 at 9:53 am

Funny how Pittsburgh saw its industry leave town, but it is now one of the most livable cities in America. It must be something else….

prior_approval July 25, 2013 at 10:51 am

You mean something like this, including all the mentioned non-affiliated institutions? –

‘The university began as the Carnegie Technical Schools founded by Andrew Carnegie in 1900. In 1912, the school became the Carnegie Institute of Technology and began granting four-year degrees. In 1967, the Carnegie Institute of Technology merged with the Mellon Institute of Industrial Research to form Carnegie Mellon University. The university’s 140-acre (0.57 km2) main campus is 3 miles (4.8 km) from Downtown Pittsburgh and abuts the Carnegie Museums of Pittsburgh, Schenley Park, and the campus of the University of Pittsburgh in the city’s Oakland and Squirrel Hill neighborhoods, partially extending into Shadyside.

Carnegie Mellon has seven colleges and independent schools: the Carnegie Institute of Technology (engineering), College of Fine Arts, Dietrich College of Humanities and Social Sciences, Mellon College of Science, Tepper School of Business, H. John Heinz III College and the School of Computer Science.’ http://en.wikipedia.org/wiki/Carnegie_Mellon_University

And as another example, let’s take Baltimore, another region that had a major steel making presence (and shipbuilding, and railroad maling…) which has disappeared, but which also has this –

‘The Johns Hopkins University[5] (informally Johns Hopkins, JHU, or just Hopkins) is a not-for-profit[6] private research university based in Baltimore, Maryland, United States. The university was founded on January 22, 1876, and named for its benefactor, the philanthropist Johns Hopkins.[7] Daniel Coit Gilman was inaugurated as the first president on February 22, 1876.[8]

Johns Hopkins maintains campuses in Maryland; Washington, D.C.; Italy; China and Singapore. The university is organized into two undergraduate divisions and five graduate divisions on two main campuses—the Homewood campus and the Medical Institutions campus—both located in Baltimore. The university also consists of the Paul H. Nitze School of Advanced International Studies, the Peabody Institute, the Carey Business School, and various other facilities.

Johns Hopkins pioneered the concept of the modern research university in the United States and has ranked among the world’s top such universities throughout its history. The National Science Foundation (NSF) has ranked Johns Hopkins #1 among U.S. academic institutions in total science, medical and engineering research and development spending for 31 consecutive years.[9] As of 2011, thirty-seven Nobel Prize winners have been affiliated with Johns Hopkins,[10] and the university’s research is among the most cited in the world.[11]’ http://en.wikipedia.org/wiki/Johns_Hopkins_University

So, anyone care to name any major educational institution created in Detroit by the titans of the auto industry?

Again, what was good for GM in the past is clearly bad for the everyone in the present.

George Doehner July 25, 2013 at 11:21 am

The problem with your analysis is that Baltimore is Detroit on the Chesapeake. Portland Oregon has all of the tax and regulatory polices of Detroit, no major university and yet has avoided all of the problems we see with Detroit and Baltimore. That’s the problem with the Mathew Yglesias analysis. It does not explain most of the examples. Stanford is as far from San Francisco as U Michigan is from Detroit. Yet, we are told Stanford shapes San Francisco, but Michigan has had no impact on Detroit. Boston has not had a manufacturing base for generations, yet it sank into decrepitude in the 70’s and then rebounded in the 80’s and 90’s.

There’s no simple economic explanation for Detroit or many other American cities heading down the same hole.

NPW July 25, 2013 at 2:19 pm

I was born near to Detroit and most of my extended family is still in MI causing me to go back to visit. I currently live in Maryland just south of Baltimore. Detroit is in far worse shape than Baltimore, IMO. So much worse I don’t even see a comparison. Not only is Detroit going down, but it is taking the area around it down too, contrary to the repeated statements that the suburbs are just fine.

Living between Baltimore and DC, I have far more issues with problems originating out of the Capitol than I have Baltimore.

Tim July 25, 2013 at 6:07 pm

UCSF + SFSU is a hell of a lot bigger than Stanford, and in the city limits. Stanford shapes Silicon Valley, which in turn influences SF, but it’s hard to see the direct Stanford-SF influence, especially compared to the universities that are actually in the city.

kjhgfdsa July 25, 2013 at 1:10 pm

“So, anyone care to name any major educational institution created in Detroit by the titans of the auto industry?”

Kettering University, formerly General Motors Institute.
Oakland University, founded by the Dodge family.
The Henry Ford Trade School
the Edison Institute
Wayne State University has also received many donations from auto related companies including Ford & GM

There are more here http://blog.hemmings.com/index.php/2013/05/29/detroit-automakers-and-higher-education-the-henry-ford-trade-school-and-general-motors-institute/

prior_approval July 25, 2013 at 10:51 am

You mean something like this, including all the mentioned non-affiliated institutions? –

‘The university began as the Carnegie Technical Schools founded by Andrew Carnegie in 1900. In 1912, the school became the Carnegie Institute of Technology and began granting four-year degrees. In 1967, the Carnegie Institute of Technology merged with the Mellon Institute of Industrial Research to form Carnegie Mellon University. The university’s 140-acre (0.57 km2) main campus is 3 miles (4.8 km) from Downtown Pittsburgh and abuts the Carnegie Museums of Pittsburgh, Schenley Park, and the campus of the University of Pittsburgh in the city’s Oakland and Squirrel Hill neighborhoods, partially extending into Shadyside.

Carnegie Mellon has seven colleges and independent schools: the Carnegie Institute of Technology (engineering), College of Fine Arts, Dietrich College of Humanities and Social Sciences, Mellon College of Science, Tepper School of Business, H. John Heinz III College and the School of Computer Science.’ http://en.wikipedia.org/wiki/Carnegie_Mellon_University

And as another example, let’s take Baltimore, another region that had a major steel making presence (and shipbuilding, and railroad maling…) which has disappeared, but which also has this –

‘The Johns Hopkins University[5] (informally Johns Hopkins, JHU, or just Hopkins) is a not-for-profit[6] private research university based in Baltimore, Maryland, United States. The university was founded on January 22, 1876, and named for its benefactor, the philanthropist Johns Hopkins.[7] Daniel Coit Gilman was inaugurated as the first president on February 22, 1876.[8]

Johns Hopkins maintains campuses in Maryland; Washington, D.C.; Italy; China and Singapore. The university is organized into two undergraduate divisions and five graduate divisions on two main campuses—the Homewood campus and the Medical Institutions campus—both located in Baltimore. The university also consists of the Paul H. Nitze School of Advanced International Studies, the Peabody Institute, the Carey Business School, and various other facilities.

Johns Hopkins pioneered the concept of the modern research university in the United States and has ranked among the world’s top such universities throughout its history. The National Science Foundation (NSF) has ranked Johns Hopkins #1 among U.S. academic institutions in total science, medical and engineering research and development spending for 31 consecutive years.[9] As of 2011, thirty-seven Nobel Prize winners have been affiliated with Johns Hopkins,[10] and the university’s research is among the most cited in the world.[11]’ http://en.wikipedia.org/wiki/Johns_Hopkins_University

So, anyone care to name any major educational institution created in Detroit by the titans of the auto industry?

Again, what was good for GM in the past is clearly bad for everyone in the present.

prior_approval July 25, 2013 at 10:52 am

Soory about the double posting there.

Tarrou July 25, 2013 at 11:19 am

Or maybe, maaaaaaaaaaybe the race riots kicked off mass middle-class flight, and the decades of following corruption by union, city and industry leaders gutted confidence in the local government and institutions, while the criminal underclass took over the streets. Maybe blaming the fall of Detroit on a lack of universities is the stupidest thing I’ve heard in days.

RZ0 July 25, 2013 at 12:21 pm

The examples I’m seeing here of successful returns from urban decline – Boston, Pittsburgh – involve towns that reinvented themselves. Pretty clearly Detroit never reinvented itself after the auto jobs left in the 1980s.
Had Detroit found a new economic base, taxes, corruption and union dominance would have been problems. But to say these problems sank the city does not explain why other towns have the same problems but overcome them.

mike July 25, 2013 at 2:37 pm

The problem is that the industry drew in a ton of parasites, who drove out all the people who were capable of inventing or re-inventing anything. Boston and Pittsburgh never drove those people out, so they were able to rebound. The best comparison to Detroit isn’t Pittsburgh or Boston, it’s Haiti.

Hazel Meade July 25, 2013 at 12:09 pm

The problems with the US auto industry stem from rising international competition, not the horror of Detroits automakers seeking lower cost labor. Had Detroits automakers not “sent jobs out of their own city” it would only have hastened the decline in their market share. I suppose your answer to this is that the US should have barred imports on Japanese autos.

RZ0 July 25, 2013 at 12:36 pm

I’ve owned Japanese autos for around 30 years, so I really wouldn’t have favored that sort of ban, though I seem to recall something of the sort in the 1980s.

Labor costs were part of the U.S. auto industry’s problem, but only a part.

The incompetence of Detroit’s auto manufacturers is well-documented. Five decades into the invasion of imports, and U.S. autos still lag imports in quality. Given the changes in the industry, it’s hard to blame unions for that.

Twice the industry has practically bankrupted itself – in the late 70s-early 80s and again in 2008. Both times it got caught manufacturing low mpg autos when oil prices spiked. Again, hard to blame the unions.

JWatts July 25, 2013 at 2:11 pm

Five decades into the invasion of imports, and U.S. autos still lag imports in quality. Given the changes in the industry, it’s hard to blame unions for that.

If you’ve worked in automotive plants it’s not hard to blame the unions at all. I once helped design and deploy an error proofing system for an American auto plant in 2001. It was to avoid placing the wrong stereo in the chassis. The employees basically didn’t care if they installed the wrong stereo and there was no effective way to force them to. They could only be reprimanded if they failed to install a stereo in each vehicle.

The system was a 3 by 3 grid of cells with a red/green light at the top of each cell and a light curtain in front of each cell as a sensor. The system knew which stereo should be loaded in the current car frame on the skid. So, it lit up the green light for the correct cell. If you placed your hand in the wrong cell the red light would turn on. The system would stop the line (the car skid wouldn’t move forward) until the light curtain for the correct cell had been triggered.

It was a system that a smart chimpanzee could have operated correctly.

By the end of the first week, I was watching an operator take a bundle of stereos and work their way up the line 8 or 9 cells installing them. Then she went back to sit in a chair at the front of the cell and picked up a book. When the skids moved forward (every 90 seconds or so), a cell would turn green and the operator, without taking her eyes off the book, would stick rhe hand through the correct cell and the system would register a correct pick.

If you tried that kind of shenanigan at Nissan or Toyota, you’d be fired immediately.

Joe in Morgantown July 25, 2013 at 2:12 pm

US automakers have been successful internationally. Foreign automakers have been successful making cars in the US.

What these success stories lack is the UAW. Maybe it’s a coincidence.

Bender Bending Rodriguez July 25, 2013 at 5:14 pm

Someone is going to need aloe-vera for that burn.

Tarrou July 25, 2013 at 3:28 pm

Allow me an anecdote here. I live in an old auto-building town in Michigan which used to be home to ever fifty factories, all building various car parts. There is one left, and it is Chinese owned these days. I’m a vet, and nearly all my fellow VFW and MOPH members are former auto workers and UAW members. These are my guys, my friends, my shooting, fishing and drinking buddies. They are good guys. But I listen to their stories of their work days, about how one guy would come to work and clock a dozen of his pals in at the start of the day and out at the end, so they could all go on a road trip or something. How they’d steal the counterweights from machinery to melt down and cast bullets. Hey, I used to be Army, I know all about bureaucratic BS and waste, but I can’t help thinking that if all that was what the good lads were up to, what were the real scammers doing? And how can an industry that wasteful have survived as long as it did?

James H July 25, 2013 at 8:52 am

City income taxes in Michigan are pretty low. Even at the highest rate, it’s still just a flat 2.4 percent on top of Michigan’s flat 4.25 percent.

Despite high property tax rates, most people moving into a home in the city are likely to see tax savings. The average home in Detroit is selling for $19,187 so far this year, far below every other area in the state (nation?). Divide by two to get the taxable value and you’ll see that even high rates don’t lead to much revenue. In other words, you can probably buy a house with the same floorspace and amenities as your old house at a fraction of the cost, leading to tax savings. (http://www.mirealtors.com/content/upload/AssetMgmt/Site/HOUSING/Jun13stats.pdf)

Make sure you don’t have to pay back-taxes on the property when you purchase it.

Some homes of people that have been there for years are locked in to higher taxable values–and who knows whether the county assessor is adequately mitigating values to the new norm.

While it’s possible that lowering taxes will pay off in the long run, certainly in the short-term the best way to increase the attractiveness of Detroit is to figure out how to implement basic government services. For instance, responding to emergency police calls in less than an hour.

Rahul July 25, 2013 at 8:56 am

“the best way to increase the attractiveness of Detroit is to figure out how to implement basic government services. For instance, responding to emergency police calls in less than an hour.

Perhaps the city needs to prioritize and declare certain areas as off city limits? I am not sure it is economically viable to provide fast response times (and street lights etc.) to the entire city at its current thinned out population.

jeff fisher July 25, 2013 at 9:43 am

Seems to me that is, now, part of the problem anyway.

I believe they have already done some of that. Demolishing abandoned structures, closing off some roads, encouraging people to consolidate into some neighborhoods and abandon others.

However they are in a death spiral. They don’t have the money to do as much of that kind of thing as they need to, and it runs into property-rights problems, particularly when you try to do it on a shoe-string.

Points to needing help from higher levels of government. State and federal funding for unwinding cities which shrink dramatically.

John Thacker July 25, 2013 at 8:53 am

Detroit residents pay the highest total property tax rates

Actually, from what I recall, the correct statement is “Detroit residents are assessed the highest total property tax rates.” With the breakdown of services and order, half of Detroit property owners don’t pay taxes.

buddyglass July 25, 2013 at 9:17 am

Besides the low mean income of its residents, one of Detroit’s big problems seems to be that it’s just too big for the residents who remain, which drives up the per capita cost to maintain basic services. Could it just draw a small-ish circle and cede everything outside that circle back to the state? Cities can annex surrounding areas; can they divest themselves as well? What if Detroit simply unincorporated itself and ceased to exist as a municipality, foisting all the services back onto the counties it spans?

Mark July 25, 2013 at 9:30 am

Detroit is only in Wayne county, but I believe part of the plan is migrating certain services into government-level authorities that exist outside city and county government.

buddyglass July 25, 2013 at 10:52 am

Really I’m just curious about the legal question surrounding a government entity deciding to “cease to exist”. Is that even possible? Imagine Detroit wasn’t in the red and debt wasn’t a concern. How would “dissolution” happen? Would it require a referendum from the voters, or could a city council do it? Would the state (in this case Michigan) need to “approve” the dissolution?

Urso July 25, 2013 at 12:43 pm

I don’t know about Michigan specifically, but many states have laws providing for soem kind of dissolution procedure.

http://www.leginfo.ca.gov/cgi-bin/displaycode?section=gov&group=55001-56000&file=56000-56001

dearieme July 25, 2013 at 9:18 am

Why bulldoze the abandoned properties? The quick and conclusive solution is to bulldoze the others. Just demolish the dump.

Dan Weber July 25, 2013 at 12:11 pm

I don’t understand. Is there a distinction between bulldozing and demolishing?

Abandoned buildings become crack houses and are eyesores. If no one wants to live there, take it out.

The houses each of my parents grew up in (in Detroit) burned down long ago.

mike July 25, 2013 at 9:20 am

Maybe time to think about ending the State and Local Tax deduction, which essentially allows taxpayers to deduct their payments for services purchased through state and local governments such as jobs for rich mens’ wives and art museums, etc? The SALT deduction is regressive as hell, it makes no sense, and it subsidizes high-tax expensive-services state and local governments. Terminate with extreme prejudice.

AADL July 25, 2013 at 9:21 am

These tax figures understate the problem, because Detroit City has a high percentage of net tax consumers (both New Class parasites and pure public parasites). They don’t pay taxes even if they file income tax returns and send a check to the local fisc. It just reduces the amount of taxes they consume.

de Broglie July 25, 2013 at 9:39 am

The average IQ in Detroit is too low to maintain a modern civilization. This is the primary reason Pittsburgh succeeded and Detroit failed.

don July 25, 2013 at 9:49 am

Michigan should engineer a municipal annexation of Ann Arbor by Detroit. Politically they must be a close match. The real benefit though would be the increase in income and racial diversity, which should warm the hearts of everyone in Ann Arbor. I’m surprised they haven’t proposed it already.

zbicyclist July 25, 2013 at 11:54 am

“Politically they must be a close match.”

Not really. Remember all politics is local and liberals vote their interests as well. Academics tend to favor government programs like public radio, the National Science Foundation, the National Endowment for the Humanities, (etc.). People on welfare tend not to care about these much but favor programs that benefit them.

John Brennan July 25, 2013 at 10:16 am

Detroit’s city income taxes (levied on residents and commuters AND corporations) lie at the core of the exodous of capital from the central city and county. One commenter noted that the city income taxes were low. That could not be more wrong in terms of the history of the problem. In 1999, when the State of Michigan made a deal with the City of Detroit to reduce its local income tax rate from 3 percent to 2.5 (for city residents) and 2 percent to 1.5 for non-resident commuters. In 1999, only the City of Philadelphia, PA had a higher income tax. Instituted in 1965, the income tax has always been seen as confiscatory (where Detroit has been allowed to assess higher rates than any other city in the state). The passage of the income tax automatically created tax havens in the suburbs where Wayne County (location of Detroit) went from being the wealthiest county in terms of aggregate property valuation in the Greater Detroit region (and the United States) to the only central urban county of a Metropolitan Statistical Area (MSA) in the United States to have less aggregate property valuation than any one of the surburban counties (in this case, Oakland County presently has 50 billion dollars in aggregate property values where Wayne county has 42 billion dollars in aggregate property values). I do not dispute that racial issues were a major problem causing white flight in Greater Detroit, but the economic/fiscal issues were just as important. Residents, jobs, and companies fled Detroit, in part, due to the confiscatory local income tax.

jeff fisher July 25, 2013 at 10:28 am

An article with information on city/county income tax rates around the US.
http://taxes.about.com/od/statetaxes/a/City-Income-Taxes.htm

The current 2.4% rate is on the high end of cities with such rates, but hardly unique. Even 3% is currently exceeded by a number of cities including NYC and Pittsburgh which are both doing well.

Jeff Fisher July 25, 2013 at 10:32 am

Sorry, Pittsburgh is at 3%, 1% for non residents.

John Brennan July 25, 2013 at 11:56 am

In 1999, Detroit was second highest. New York City does not tax commuters at all at this point and when they did, the rate was .25 percent I believe. My main point was that there was considerable opportunity to flee the high taxes of Detroit, and companies and taxpayers did so. With respect to Pittsburgh, see:

http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=5&ved=0CEgQFjAE&url=http%3A%2F%2Flibrary.oregonmetro.gov%2Ffiles%2F%2Fmsa_popdata_1990_2010.pdf&ei=zUnxUf7VG5GO9ATztoCwDQ&usg=AFQjCNFmjTMKmEsiZpvEVTNc_TvhuJ1mLg&sig2=YUJRwLR6o4754qxC6VRh6g&bvm=bv.49784469,d.eWU&cad=rja

Just as bad as Detroit and Cleveland!

Bill July 25, 2013 at 10:25 am

This is an interesting public finance question, but not one of the Laffer curve.

Ask yourself this question: Are city taxes a function of how states allocate responsibilities to local governments, or assume responsibilities of local governments, and finance those responsiblities through state taxes. In other words, unless you look at state income taxes, sales taxes, school levies and how schools are financed, etc. you do not understand a thing.

I live next to a state whose citizens pay high property taxes and low income taxes. I live in a state with high income taxes, and low property taxes. Each finances local education differently.

Unless you look at the total picture, you don’t know anything.

By the way, NYC income taxes are much higher.

TMC July 25, 2013 at 12:20 pm

That’s only one side of the ledger. NYC provides much better services/opportunities than Detroit does.

derek July 25, 2013 at 10:29 am

This may be true, as well as the last ‘Why Detroit Failed’ post. A failure of this magnitude almost always has multiple causes. If Detroit lowered it’s taxes would things improve? Maybe. Does the decrease in cost make up for the security arrangements necessary to live there? In my jurisdiction if I have people working at anything remotely hazardous I’m responsible for getting them emergency medicine in a timely way. Would the decrease in tax rates make up the cost difference? Is there enough savings to cover any corruption costs? My workers would want their kids to get an education of some sort, would I have to set up an elementary and secondary school as well?

The most interesting thing I read this week was that for years anyone who brought up the decline of Detroit was accused of being a white supremacist.

David July 25, 2013 at 10:32 am

Where Detroit really is on the Laffer Curve is an interesting empirical question of the type that rarely gets addressed. What does the research literature show on how to determine where a city is on that curve?

The Orr Report hedges that lowering taxes may have neutral-to-positive effect on revenue, but doesn’t offer much evidence to bolster that claim.

Higher taxes are driving out some residents, but that’s what we would expect, even if total revenue were increasing. Detroit’s tax rates are higher than those of its neighbors, but again that doesn’t prove they’ve crossed the peak of the Laffer Curve. There may still be a lot of curve to go up before they hit peak revenue, but I don’t know how we’d figure that out.

jeff fisher July 25, 2013 at 10:56 am

The research done on the revenue maximizing top marginal tax has given estimates from around 48% (Mankiw) up to 83%. That range completely swamps differences in taxation between any two cities in the US. Further the entire US is currently below those revenue maximizing top marginal tax rates.

I have never seen an estimate of revenue maxima that was not talking about top-marginal rates, however.

Brian Donohue July 25, 2013 at 11:23 am

This is another conversation (reminiscent of the R&R flap) that focuses on some kind of ‘optimum’ or tipping point. But the point about declining marginal increases from increases in tax rates is that it holds over the entire range. Little by little. It’s why ‘marginal revolution’ is intentionally oxymoronic.

prior_approval July 25, 2013 at 12:05 pm

No, ‘marginal revolution’ is intentionally chosen –

‘This moment in the late 19th century marked a turning point in economy theory. With the introduction of these theories, the analysis of production and exchange turned away from social theory and towards the quest of a scientific objectivity. Classical economics had focused on the causal relations among social activities, which were connected with the production and distribution of wealth. Classical economists asked questions about the true basis of value, activities that contributed to national wealth, systems of rights, or about the forms of government under which people grow rich. But in the late 19th century, in response to attacks from socialists and debates about how society works, and as a means to escape the conundrums of value theory and to answer how values could become prices, economists developed the theory of marginalism. Marxists assert that this movement in economics disengaged economics from descriptive and normative commitments with the aim to withdraw economics from debates about how society worked and what kind of society we wanted to live in, and escalate it to an objective and universal realm.’ http://en.wikipedia.org/wiki/Marginalism#The_Marginal_Revolution

Though more self-aware individuals can recognize just how deceptively the title references this revolution, as this web site is tireless in attempts to interject itself into debates about how society works and what kind of society we should desire to live in, while wrapping itself in the aura of existing in an objective and universal realm.

Making this a truly pomo sort of place, from a certain perspective. Other, equally valid perspectives, are much less amusing or charitable.

Cliff July 25, 2013 at 12:27 pm

Has the web site come alive then? Quite remarkable for a website to interject itself into debates.

J. Bang July 25, 2013 at 11:41 am

Lowering taxes *MIGHT* help revenue in this case, but even if you are right about that, it would take a long time for any positive effects to be realized. Even then, it’s not really a “Laffer Curve” effect.

Dan Weber July 25, 2013 at 12:13 pm

Yeah, I don’t understand why Laffer is brought in.

Detroit has had a tax spiral. Even in the 1980’s I had a very liberal relative describe to me how Detroit had fewer and fewer people and needed to keep on charging them more and more in taxes to keep itself afloat which drove out more and more people. Even if the actual tax incidences were modest, they were still felt by the people.

The city took its population for granted. You need to realize people can leave and work to make your city nice enough to live that they don’t.

Hazel Meade July 25, 2013 at 12:21 pm

I really think Detroits problem have nothing to do with any of this.

#1. Detroit lies on the Great Lakes, not the Atlantic or Pacific Ocean, thus it’s usefulness as a port has declined as ships have gotten bigger and trade has shifted to larger international markets instead of national/Canadian markets.
#2. Industrialization in Asia is primarily responsible for the decline of US automakers. The Japenese built better, cheaper cars, and now other countries are doing it too. There is no way that US automakers could respond to that by doing anything other than reduce labor costs and automate. All of that would inevitable have an impact on wages, living standards, population and tax base.

Reality is there just isn’t any economic reason to have a huge city located where Detroit is located anymore. It’s not a good place for international shipping, it’s not an agricultural center, or a financial center, or a technology center. It’s not a fun tourist destination.

If there is any lesson to be learned, it is probably one about what happens to cities or nations that base their economy primarily around a single industry, when that industry goes into decline. Sometimes this happens naturally. When the oil runs out, what do you think will happen to Dubai?

RZ0 July 25, 2013 at 12:46 pm

+1 here. As the thread makes clear, certain cities handle declines well. Detroit did not. I don’t think there’s any rule that says a big city has to handle it’s problems well. This sounds to me like a sort of a free market, though a bit odd to think about local governments competing with one another.
Some governments will make mistakes, decline and die. Others will falter and recover.

Tummler July 25, 2013 at 2:56 pm

This is absurd. There has been very little decline in population of the greater Detroit metropolitan area, and until the 90s was still experiencing positive growth. Blaming the City of Detroit’s problems almost entirely, or even largely, on supposed unavoidable macro trends is nothing but hollow excuse making for the failed politics of the city.

TMC July 25, 2013 at 12:23 pm

“Yeah, I don’t understand why Laffer is brought in.”

Yet you go ahead and pretty much describe it.

CG July 25, 2013 at 12:40 pm

Why did people leave Detroit as a result of high taxes, but not New York, Chicago, or San Francisco?

prior_approval July 25, 2013 at 1:34 pm

Chicago’s population has declined -6.9% between the 2000 and 2010 Census.

Brian Donohue July 25, 2013 at 2:55 pm

Digging in, the white population dropped 5.8%, the Hispanic population grew by 3.3%, and the black population fell by 17.2%. From this we conclude that blacks are especially sensitive to high taxes and Hispanics are not, right?

JWatts July 25, 2013 at 2:27 pm

New York City experiences the largest loss of people within a city in American history when it loses nearly 900,000 people in only a ten-year span. The city experienced severe financial strains and near bankruptcy of the local government during the 1970s until it was bailed out by the federal government.

And as to Chicago 1950-3.62M > 1960-3.55M > 1970-3.34M> 1980-3.00M> 1990-2.78M 2010-2.70M

Chicago is depopulating and has been for 60 years. The only decade of growth since the 1950’s was the 1990’s.

save_the_rustbelt July 25, 2013 at 1:23 pm

Of Detroit’s problems, taxes would barely rank in the top ten.

Most of the “expert” commentators on the Detroit situation have never even been in the city.

More nonsense from the dittohead crowd.

mulp July 25, 2013 at 1:30 pm

Why have market incentives failed to incent say 100,000 of Detroit residents to move to Livonia to get twice the income and half the tax burden? Or alternatively, by moving 80-90,000 people from Detroit, a market equilibrium of population density, per capita income, and I’ll bet tax burden would be achieved – density up 80% in Livonia, down in Detroit, per capita income down in Livonia, school costs up in Livonia down in Detroit changing taxes in same direction.

In the public policy debate, we have the markets solve all problems camp opposed to the government interventionists. but according to the free market solutionists, all the residents of Detroit should move to Livonia, until its prices cease to be the most rational when they will switch to Southfield, etc.

Why hasn’t the free market equalized the per capita incomes and taxes?

Do we have immigration restrictions that prevent the free market from working? Has Livonia built a border wall and placed guards on the border to control immigration?

Dan Weber July 25, 2013 at 2:11 pm

The people who haven’t moved out of Detroit already are either unable to move or unwilling to move.

mulp July 25, 2013 at 2:20 pm

They don’t have legs?

Or there is a wall with border guards keeping them inside?

Economist claim the free market will result in individuals taking actions that create market equilibriums. Why isn’t that true for Detroit? Why don’t Detroit residents exercise rational economic choice?

Dan Weber July 25, 2013 at 2:23 pm

Maybe you should go ask them. Walk down Kelly Road, knock on doors, and ask people why they haven’t left yet.

not-ed-glaeser July 25, 2013 at 3:44 pm

Typically suburbs have tight zoning laws that price out the poor.

Cascadian July 25, 2013 at 1:37 pm

Yeah, I’m not seeing this as a tax story, except secondarily. Once the decline was well underway, the tax situation didn’t help, but there’s little evidence that lowering tax rates will fix the problems.

Detroit’s failures have many problems, but here are the biggest ones: 1) it invested heavily in a single industry that is in long-term decline, 2) Detroit built itself around the automobile, hollowing out its urban density and everything that makes cities work even before it started losing population, 3) it has had a particularly bad case of racial segregation, with massive white flight to the suburbs, 4) all of that resulted in massive capital flight to those same suburbs, including what little prosperity reached the black middle class (which also fled when it could), 5) the remaining population is income poor, yet the infrastructure maintenance and other services required by them is still high. The sprawling nature of car-oriented development makes this even worse than it would be otherwise.

No other city (in the US or the world) was the monocultural hub of worldwide auto manufacturing, or so rebuilt itself around the automobile. And no industry’s product is so bad for cities as the auto industry. That’s why Detroit’s failure is unique.

The problem isn’t the Detroit metro area in aggregate, but the core as compared to the periphery. A Detroit-only solution will never work, because the wealth needed to fix the problem, while still in Michigan, is not available in the city. Fixing this requires finding a way to reverse fifty years of capital flight by getting the people in the suburbs and the people in the city to find common cause and reinvest in the rebuilding of the city.

And you don’t get that on the city’s current path, where an outside state government is imposing terms (including future austerity to deal with bankruptcy) without the backing of the people in the city. In fact, I’d argue that the emergency manager law and state government that back it are exactly the sort of people that caused Detroit’s problems in the first place.

mulp July 25, 2013 at 2:26 pm

In short, too many black people live in Detroit.

They should chose to be white – that is the rational economic choice.

Maurice de Sully July 25, 2013 at 2:49 pm

– Once the decline was well underway, the tax situation didn’t help, but there’s little evidence that lowering tax rates will fix the problems. —

That may well be true but it’s rather besides the point. The post asks, and the Laffer curve itself merely contemplates, whether a reduction in taxes would create additional revenue. Not whether said reduction and the increase in revenue will fix the host of the other issues referenced in the thread.

Tax revenue is a subject worthy of economic discussion and Laffer is a part of that discussion. “Fixing” what ails Detroit is a much more complicated question. Interesting to be sure, but a much different conversation than was introduced in this post.

Aaron Aardvark July 25, 2013 at 2:23 pm

In one of his columns earlier in the week, Paul Krugman maintains that Detroit’s failure is an example of a market, not government, failure.

mulp July 25, 2013 at 2:31 pm

Let’s say Detroit were put up for auction as a private charter city with the proceeds used to pay off all liabilities, and Carlos Slim was the highest bidder, beating out a Saudi wealth fund which is tied up paying for its own charter cities in the UAE.

What changes would Carlos Slim make to turn Detroit into a successful charter city?

If government is the problem and the market would solve the problem, what would Carlos Slim do to solve all the problems of Detroit.

JWatts July 25, 2013 at 4:50 pm

If government is the problem and the market would solve the problem, what would Carlos Slim do to solve all the problems of Detroit.

Move in a bunch of hard working Mexicans?

Wondering July 25, 2013 at 2:30 pm

Lots of interesting theories about why Detroit is bankrupt.

Nobody (here, at least) seems to want to point out that the city is 80% African American, and the average African American IQ is 85.

Keep everything exactly the same, but replace Detroit’s current inhabitants with Asian Americans (IQ ~110) and it’s reasonable to suspect that it would turn around very quickly.

Detroit’s decline is unusual for America, but it wouldn’t be out of place in an African country. I predict that we won’t see the city rebound until there is a serious demographic shift, which seems unlikely, since high IQ whites and asians are unlikely to want to move to a city with the highest murder rate in the country (which is almost certainly due to the city’s demographics).

MD July 25, 2013 at 4:13 pm

Not at all sure how you can look at modern East Asian history and conclude that they have some kind of innate talent for good government. The smartest people in Japan were in charge of Japanese government and industry in 1935, and that turned out worse than Detroit. It may have been an *efficient* train wreck, but it was a train wreck all the same.

Wondering July 26, 2013 at 2:42 am

You’re right to some extent. Intelligence doesn’t seem to guarantee good governance, but it is certainly a prerequisite. However, high intelligence also seems to mitigate against poor governance. China may be corrupt as hell, but it’s still growing strong. Greece may be a basket case, but it’s still a better place to live than anywhere in Africa.

MD July 26, 2013 at 11:43 am

Please audit a modern Chinese history class at your local college and get back to me. Use that big special brain of yours and learn something.

Rationalism01 July 27, 2013 at 2:41 pm

It would certainly be interesting to try the following experiment: Take 30 or so cities, populate 10 with white & Asian people, 10 with Mexicans, and 10 with African Americans and watch what happens for 50 years.

I expect that the outcome wouldn’t change anyone’s mind, though. Look at China, Japan, Indonesia, etc. Then look at Africa.

Peldrigal July 25, 2013 at 8:10 pm

From the other side of the pond, am I the only one that just founds idiotic that pensions are paid by smaller than state-sized constituencies? That way productive people migrate, and a city gets stuck with the debts accrued when there was a boom in times of hardship. I may be wrong, but I’ve never found the problem addressed.

Wondering July 26, 2013 at 2:47 am

I guess that’s because America’s federalism is based (theoretically) on protection of liberty, rather than something more practical, like German subsidiarity.

dan1111 July 26, 2013 at 2:44 am

High tax rates have certainly been a driving factor in creating the current situation. Yes, it appears that large swaths of the city are past a point of no return and won’t be revitalized at any level of taxation. But that is not the entire city. Some areas are still alive, and lower tax rates would make a difference.

The Anti-Gnostic July 26, 2013 at 9:17 am

All very thought-provoking, except most residents of Detroit are net tax consumers.

RickG July 26, 2013 at 11:50 am

Of the 47% of property owners who didn’t pay their property taxes, what fraction actually live in those properties? I suspect many of the delinquent are absentee landlords, or investors/speculators. Why aren’t they being tax foreclosed and sheriff saled? That would clear up urban blight and get someone who is actually willing to pay for city services in those houses. There is some price where people willing to pay taxes will buy them, and if not the city can always build up a land trust for collateral.

The Anti-Gnostic July 26, 2013 at 12:52 pm

Because nobody wants the properties, not even the local government.

If the owner doesn’t want to live there, doesn’t want to pay the taxes for the infrastructure there, then what does that tell you about the value of the property? It’s less than the taxes and maintenance.

If you disagree, then there’s lots of cheap property all over Detroit for you to buy.

You could set up a technology company, hire all the local talent idled by the negative animal spirits, and be as rich as Zuckerberg.

Rationalism01 July 27, 2013 at 2:43 pm

“Hire all the local talent”

lol…

stalin July 26, 2013 at 4:52 pm

The problem with your analysis is that Baltimore is Detroit on the Chesapeake. Portland Oregon has all of the tax and regulatory polices of Detroit, no major university and yet has avoided all of the problems we see with Detroit and Baltimore – See more at: http://marginalrevolution.com/marginalrevolution/2013/07/detroit-taxes-and-the-laffer-curve.html#comments.

Detroit Black or African American 82.7% .
Baltimore Black or African American 63.7% .
Portland Black or African American 6.3%

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