This is the largest trade hub in EVE online, A massively multiplayer spaceship
game with by far the most realistic financial system in the virtual world.
And this is downtown Manhattan, the largest trade hub, in well, the real world.
These two regions of concentrated commerce have more than you might expect in common
and what has happened before in this virtual world,
might be a very good indication of what end’s up happening here in the real world.
But we are getting ahead of ourselves.
In our last video in this series we explored how eve online’s massive in game wars were financed,
and at a cost of hundreds of thousands or even millions of dollars… why they were financed…
Now a few people reached out to me after that video and said I missed a very interesting detail,
the battle over in game tax havens.
You see when a financial system is as realistic as the one in EVE Online,
it comes with some unfortunate realities as well, most notably,
needing to work hard to make in game money, currency inflation and of course paying taxes…
So it’s time to learn how money works and take a
look at the different taxes players in eve online are expected to pay,
how they avoid paying them, and what this can teach us about the fate of New York.
So to start off with there are the taxes that we explored in our last video that are paid
by individual players on their income and paid to the corporation they are a member
of. These are the taxes that in turn, go on to fund the wars that make newspaper
headlines so most of the members of these corporations have no problem paying them.
Even if they do decide that they would rather not pay these taxes it is as simple as finding or
indeed forming a corporation with a zero percent tax rate. Simple enough.
There is however a type of tax that is far less popular amongst the players of this game because
it is much harder to avoid and doesn’t get used to fund epic space battles, these are sales taxes.
Every day millions of transactions take place in the trade hubs across this virtual galaxy
as everything from basic supplies to huge speculative positions are
bought and sold back and forth between the players of the game.
Every time this happens a percentage of this sale
is taken out and paid to the secure commerce commission,
which is the not so subtle in game equivalent of the American securities and exchange commission.
The only difference is that in the real world the SEC is funded by a tiny faction
of a percent of these transactions, about 22 dollars per million dollars in sales.
In eve online however the transaction tax was around 2%. This by itself is pretty steep and
its actually one of the biggest ways the game takes money out of active circulation,
but things got really serious when this tax was more than doubled to 5% a few years ago.
There were two important things that came out of this, the first was that suddenly a video
game was making headlines for tax hikes, which is something I suppose, but more importantly
the financial elite of EVE online needed to find a way around these new onerous tax rates.
This was the solution…
This is a citadel,
a space station that players in the game can construct and place almost anywhere in space.
The largest of these structures can house their own market exchanges which means it was
possible for players to build these structures on the outskirts of established trade hubs and
undercut the new 5% tax rate being charged in the established centres.
This worked really well but it still caused a few problems.
The first was the inevitable race to the bottom.
These stations aren’t “cheap” per say, but compared to the potential revenue they
could generate as centres of exchange their upfront cost was practically a non factor.
This meant everybody with a few billion isk spare threw up these structures everywhere
across the galaxy and started competing with each other. Through the magic of
free market competition this pushed down the tax rates in these citadels from just
undercutting the 5% charged in the public stations, to practically zero percent.
This caused a lot of problems for these would be market overlords,
because at a zero percent cut they were making no money at all,
and couldn’t afford the ongoing expenses required to run these stations.
This meant most just gave up and let their stations fall into disrepair,
but some stuck it out with the promise that if they were the last man standing
they could raise their rates once again to make insane profits off this market.
In the real world we call this anti-competitive pricing. Which in
brief means pricing your product cheaply, not because it makes good business sense to do so,
but because it makes it impossible for people to compete, and once you have no competition for an
essential service, like lets say trade, then you can charge whatever you like.
Now in the real world this particular business practice is illegal and many major corporations
have seen themselves in court for exactly this reason. However as we have seen before, EVE has
an almost totally unregulated financial system so anti-competative pricing is completely fair game.
But there is one other thing that is allowed in eve that’s not so kindly looked upon in
the real world, and that is shooting down your competitors establishments.
What this meant was that the real solution to this
market competition problem was simply to forcefully remove the competition.
Eventually only the largest and most powerful alliances in the game were able to maintain
these structures and a price equilibrium was established at around 1% for every transaction.
This was still more than enough for these empires to maintain and defend these facilities
while making a healthy profit. In fact these private trade hubs have become so lucrative that
competition for them has been a major driver of the wars we explored in the last video.
Now for a video game this is great, spaceships shooting at spaceships is what its all about,
but in the real world governments wouldn’t be quiet as keen on seeing amazon express shipping
some heavy artillery fire to Walmart because it happen to steal some of it’s customers.
This means that more subtle measures are taken, but it also means that competition is an ever
present issue for small businesses, big businesses and even governments.
And here is where we can use EVE online to teach us a lesson about that real life trade hub.
You see New York is a lot like the old public trade station, it is home to
the largest financial centre in the world but also some incredibly high state income taxes.
For this reason, the state has seen an increase in
it’s wealthiest residents moving just outside its state lines to new jersey.
New Jerseys state income taxes are far lower than those levied in New York,
and it is still close enough to Manhattan that commuting in and out every day is possible.
This exodus of wealthy New York workers across the Hudson is part of the reason
why new jersey has recently become the wealthiest state in the US,
but this causes a lot of the same issues that we saw in EVE.
This process of wealthy individuals moving to more accommodating regions is called capital flight,
and there are a number of reasons why it can happen.
The most common is to move away from poor living conditions.
Wealthy people in nations with high levels of political instability and crime have been
willing to spend millions of dollars to set their families up in more stable environments.
Think of examples like people fleeing south Africa, or more recently wealthy
Chinese business leaders moving to nations like Canada, Australia and the States.
The other big driver of capital flight is to avoid tax, although it must be recognised that
this is far less common, especially when it involves moving from one country to another.
But moving from one state to another, especially when that other state is only a few miles away,
well that’s a different story, it’s much easier, you don’t need to change jobs, you are still
amongst friends and family and your kids might even still be able to go to the same schools.
Now people moving just outside of commercial centre’s to avoid paying
taxes sounds familiar right, and so too are the problems.
For starters it becomes harder and harder to maintain public services when the people you
are providing those services for are paying taxes in a different state, this means that
governments are either forced to run budget deficits, or tax the remaining residents more.
But if they tax their remaining residents more,
they will only accelerate the process of people leaving to avoid said taxes.
Of course the backup solution of waging war on the competition
probably wouldn’t go over too well here in the real world but that’s ok because EVE can also
give us a glimpse into the future of what happens when this is just left to play out.
Everything in this video game happens much faster than it does in the real world,
Where moving from new York to new jersey might take a family months of selling their home,
buying their new home, convincing their partner and all of that fun stuff,
moving across borders in EVE might take a few minutes of travel in a spaceship.
And what we have seen from this miniature model of the real world is more or less
what you would expect. Most business is still done in the old trade hubs,
and sure it has lost some revenue to the low tax competitors.
But at the end of the day customers from all over the galaxy (or maybe just the planet)
know that this is the place where business gets done, and it’s a big ask to convince
those same customers to go out of THEIR away just so YOU can enjoy slightly lower taxes.
Of course for really high value deals you can pass some of the savings along to them,
but more often than not, tradition and convenience trumps these marginal savings.
So good news New York, a spaceship video game says your gonna be alright,
you can breath a sigh of relief.
And even if that all fails, perhaps New York can solve all of its problems
by just taking a cut of the profit its federal reserve bank makes.
Go and watch our video on how the Fed became the most profitable entity in
history to find out if that is something we should be worried about, or if that is too
frightening then go and check out our other video on how wars In Eve Online are financed.
If you do enjoy those video’s be sure to like and subscribe to keep on learning how money works.