Tonight, I flew into New York for business. On the way to my hotel, I had a long, illuminating conversation with my taxi driver, who also happened to be a small business owner.
It wasn’t long before John (not his real name) started complaining about the costs of running his business in a city as expensive as New York. For example, my 30 minute ride from JFK was over $60. He was particularly upset about New York’s taxes and revenue enhancement programs like traffic cameras. To him, the city seems to have installed traffic cameras at nearly every corner, in order to squeeze as many dollars from its citizens as possible.
He also complained about high regulatory costs. To operate a cab in New York, the city requires taxi owners to purchase a medallion. The city limits the number of medallion holders to 13,000 (according to John). This limit prevents the market for taxis from collapsing. Otherwise, the barriers to entry are so low that prices would drop to a point where few would find it profitable to run a taxi business. Or so the city would have people believe. Of course, consumers would likely pay far less without the rationing. However, this point is an argument for another day.
According to John, medallions are going for $705,000 apiece – more than the cost of most residences.
Curious, I asked him how much revenue he earned a month. He said about $9,000. I then asked him how he could afford a $705,000 medallion. He responded that he only paid $335,000 when he bought his several years ago. To pay for it, he took out a loan. He now pays $3,600 each month in principal and interest – more than most Americans pay for their mortgages.
I quickly did the math in my head. If New York is remotely as bad as California, he would lose about half his revenue to state, local, and federal taxes. So, he would have about $900 each month for food, gas, and rent, after taxes and debt service.
I asked him how he managed to keep his business from collapsing. His answer was priceless:
“If you had paid me in cash, I wouldn’t have reported the transaction.”
It appears there is something to the Laffer curve after all. If government taxes people too highly, revenue will start to decline as people exploit more loopholes or bypass the system altogether.