Mamdani's 'Millionaire Tax' and Other Financial Fallacies
Mamdani, the winner of New York City's June 24 Democratic mayoral primary, campaigned on some audacious economic proposals. The 33-year-old state assemblyman seeks to eliminate fares on city buses, provide free childcare to all residents with tots aged six weeks to five years, freeze rents on currently rent-stabilized apartments, and create city-owned grocery stores.
Costs for his ambitious plans would not be trivial, with the bill for the childcare program alone estimated at $5 billion to $8 billion a year.
How to pay for it all? The self-described democratic socialist's solution is, unsurprisingly, tax increases on the city's highest-income residents. He would slap a flat 2% increase on New Yorkers earning $1 million a year or more, which he estimates would generate $4 billion of incremental revenue.
Mamdani also advocates raising the top corporate rate from 7.25% to 11.50%, which he maintains would add $5 billion annually to the city's coffers.
There are just a few problems with this.
To start with, the mayor of New York City does not actually have this type of taxing power. Mamdani would require the approval of the New York state legislature and governor.
Unfortunately for the mayoral candidate, New York Governor Kathy Hochul, who is up for reelection in 2026, has stated her opposition to Mamdani's proposed tax hikes and has not endorsed her fellow Democrat.
A further possible problem with Mamdani's revenue projections is failure to take into account the possibility, if not the probability, that many high earners will leave NYC to escape the added tax bite.
This form of 'voting with your feet' has had far from trivial results in the past. For example, in the five years through 2022, California had a combined estimated net personal income tax loss of $5.3 billion, opens new tab, with the majority of high-earners decamping for lower-tax states like Texas, Arizona and Nevada.
Another example is when hedge fund manager David Tepper switched his residence from New Jersey to Florida in 2016. Some state officials estimated that the vanished income tax dollars were in the hundreds of millions, opens new tab.
Policymakers should also not count on high earners' sentimental attachment to the Big Apple deterring them from pulling up stakes to save on taxes. There have been notable cases of individuals renouncing their U.S. citizenship altogether for that purpose, including Facebook cofounder Eduardo Savarin, mutual fund magnate John Templeton, Carnival Cruise Lines founder Ted Arison and even Monty Python member Terry Gilliam, although the latter also characterized the move as a protest against policies of then-President George W. Bush.
Another financial fallacy has been making the rounds not by Mamdani himself but by pundits discussing his funding plans: the confusion between a stock and a flow.
Several leading news organizations referred to his envisioned 2% tax hike on million-dollar-a-year earners as a 'millionaire tax.' However, 'millionaire' does not describe a person who earns one million dollars or more annually. Rather, it is an individual with a net worth of at least that amount.
This matters not only because the distinction between the income statement and the balance sheet is a concept explained in the earliest sessions of an introductory accounting course, but also because the error obscures the important fact that wealth is actually quite hard to tax, particularly in the United States.
U.S. Senator Elizabeth Warren, U.S. Representatives Pramila Jayapal and Brendan Boyle in 2024 proposed a tax, opens new tab based on wealth rather than income. It would assess a 2% tax on every dollar of net worth above $50 million and 6% on every dollar of net worth above $1 billion.
The impetus behind this proposal is that vast amounts of wealth have been created not by ordinary income, but instead by capital gains that have never been realized for tax purposes.
While it is not unreasonable to have concerns about wealth concentration, the solution here once again may prove unworkable or cause more problems than it solves.
First, wealth taxes have generally been regarded as unconstitutional in the U.S., because they are usually considered an 'unapportioned direct tax'. Though, to be fair, a 2024 Supreme Court ruling was interpreted by some, opens new tab as opening the door to this method of raising revenue.
Putting constitutional matters aside, applying a tax on unrealized gains would also face enormous administrative challenges. Listed stocks could be valued with daily, market-determined price quotations, but it would be much harder to assess the value of items such as collectibles, intellectual property, and privately held businesses.
It is easy to foresee how taxation of unrealized capital gains could lead to an explosion of litigation between taxpayers and the Internal Revenue Service, a potentially huge deadweight on the U.S. economy.
In summary, policies rooted in a flawed understanding of economic theory and economic reality are unlikely to do anything to help address real concerns, such as affordability in NYC or wealth concentration nationally.
Otto von Bismarck aptly called politics the art of the possible. Politicians that operate instead in the realm of the impossible can – and often do – get elected. But just as there is a significant difference between having a million dollars and earning a million dollars each year, there is a huge gap between a promise and a solution.
(The views expressed here are those of Marty Fridson, the founder of FridsonVision High Yield Strategy. He is a past governor of the CFA Institute, consultant to the Federal Reserve Board of Governors, and Special Assistant to the Director for Deferred Compensation, Office of Management and the Budget, The City of New York.).
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