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New York -- Even the thought of cutting taxes in New York was long akin to questioning communism in the old Soviet Union -- it was just not done. Well the Kremlin cracked first and, at long last, New York's almost theological certitude of the need for high taxes has been challenged too.
Over the past few years, New York City's feisty Republican Mayor Rudy Giuliani led the charge for a number of successful one week respites from the City and State's ubiquitous sales tax on clothing and shoes. The idea quite correctly was that if you give the consumer incentives, the people will be encouraged to spend more and voila, business will actually be brisker.
Despite its near flawless logic, the very fact that a New York politico gave credit to the people and not the all knowing mammon of government was in itself revolutionary. After all, New York City remains one of the last vestiges of socialism.
Mayor Giuliani implored people to shop and take advantage of frequent tax breaks which in reality tried to make New York competitive with neighboring New Jersey where there's no sales tax on clothing. New York City has now formally ended the 8.25% tax on apparel and shoes under $110.
As his Honor stated, "I don't think there's anyone who now that doesn't believe that if you reduce this tax you are going to end up with more income, with a lot more jobs, and help for people who need it the most." The Mayor has implored New York's Republican Governor George Pataki who also favors eliminating the tax but naturally has to face legislative hurdles, to press for greater tax relief. Four percentage points of the tax have been eliminated everywhere but some individual counties across the state have the option to retain a smaller sales tax.
While the pace of shopping for clothing and shoes picked up, the fact remains that if you give the people an incentive, the overall trend will show positively. New York has long lost revenues to neighboring New Jersey given that consumers will seek out the best shopping deals. Then there's the competition from E Commerce which remains mostly tax free.
It's heartening that New York State's politicians have finally grasped this dynamic. While the sales tax cut will cost New York City $237 million in lost collections in the coming year, the overall economic benefits will be far larger according to most business circles. Such logic looks to expand overall economic activity rather than taxing a more modest amount of commerce.
Naturally the federal nature of our Republic allows for the individual states to set--may I say impose--their own sales tax. Connecticut valley Vermonters long flocked to New Hampshire retailers to avoid a 5% tax. This was good for New Hampshire but bad for Vermont which lost the business. Conceding reality, not long ago Vermont eliminated the 5% clothing sales tax which has in effect spurred sales.
There are many economists in America who argue for a federal "value added tax" such as the Europeans have. Typically this VAT of approximately 20 % is "built into" the price of a product--in other words what you pay at a store in France already reflects this modern day tithe. It goes without saying that the European Union's VAT's which average 20% have pushed prices higher for all consumers.
Beyond usurping rightful power from the states, a VAT would spread the burden -- the misery -- more equally. We would all have the dubious privilege of paying more for everything.
Eliminating the clothing sales tax in New York -- for good -- is less a leap of faith than a long overdue recognition of economic reality and human nature. Rather than ceaselessly trying to find schemes to squeeze more money out of the people, government should start thinking about expanding the incentives and breadth of commerce -- thus baking the proverbially larger pie with more benefits for all.
John J. Metzler is a U.N. correspondent covering diplomatic and defense issues. He writes weekly for World Tribune.com.
