What EVE Online's Tax Havens Teach Us About New York's Future - How Money Works

Summary

This video explores the financial system of the MMORPG EVE Online, drawing parallels with the real-world economy. It discusses in-game taxes, the construction of 'citadels' as tax havens, and the impact of competition on trade hubs. The script compares the virtual economy's dynamics, including anti-competitive pricing and capital flight, to real-world scenarios, like New York's financial district and New Jersey's lower tax rates, suggesting that traditional and convenience often outweigh tax savings.

Takeaways

• 🌌 EVE Online's financial system is considered one of the most realistic in the virtual world, with a complex economy and trade hubs that parallel real-world financial centers like downtown Manhattan.
• 💸 The game features taxes on player income and sales, which fund in-game wars and can be avoided by forming corporations with zero tax rates or using in-game structures known as citadels.
• 🚀 A significant tax increase in EVE Online from 2% to 5% on sales transactions led to the construction of citadels by players to undercut the higher tax rates, mirroring real-world tax avoidance strategies.
• 🏭 Citadels in EVE Online allow players to establish their own trade hubs with lower or no sales taxes, creating a competitive market that can lead to 'race to the bottom' dynamics in tax rates.
• 💰 The competition among citadel owners in EVE Online led to anti-competitive practices, such as setting tax rates to zero to drive out competition, which is illegal in the real world but common in the game's unregulated environment.
• 🔫 In-game conflicts over trade hubs in EVE Online can escalate to the destruction of competitors' citadels, a form of competition not seen in the real world but indicative of the cutthroat nature of some business practices.
• 🌐 The video game's economic model provides a microcosm for understanding real-world economic issues, such as capital flight, where wealthy individuals move to regions with lower taxes, impacting public services and revenue.
• 🏙️ New York is compared to an in-game trade hub, facing challenges from lower-tax regions like New Jersey, which has become wealthier due to residents moving for tax benefits, similar to the in-game dynamics.
• 💡 EVE Online's rapid economic cycles offer insights into long-term real-world economic trends, suggesting that traditional trade hubs like New York may continue to thrive despite tax competition.
• 🌟 The video concludes with a humorous suggestion that New York could solve its financial issues by profiting from its Federal Reserve Bank, encouraging viewers to explore more economic topics through related videos.

Q & A

What is EVE Online and why is its financial system considered realistic?

EVE Online is a massively multiplayer online game set in a spaceship universe. Its financial system is considered realistic because it includes features such as in-game currency inflation, taxes, and the need to work hard to make in-game money, which mirror real-world economic challenges.

What are the different types of taxes players in EVE Online are expected to pay?

Players in EVE Online are expected to pay taxes on their income to the corporation they are a member of, as well as sales taxes on transactions that take place in trade hubs across the virtual galaxy.

How did the increase in transaction tax in EVE Online affect the game's economy?

The increase in transaction tax from 2% to 5% led to a significant change in the game's economy, prompting players to find ways to avoid the higher tax rates, such as constructing citadels with their own market exchanges on the outskirts of established trade hubs.

What is a citadel in EVE Online and how does it relate to tax avoidance?

A citadel in EVE Online is a space station that players can construct and place almost anywhere in space. It can house its own market exchanges, allowing players to build these structures on the outskirts of established trade hubs and undercut the higher tax rates charged in the established centers.

What is the 'race to the bottom' mentioned in the script and how does it relate to the in-game economy?

The 'race to the bottom' refers to the competitive behavior of players constructing citadels and lowering tax rates to attract business, eventually pushing tax rates to practically zero percent. This led to financial instability for some players who could not afford the ongoing expenses of running these stations.

How does anti-competitive pricing manifest in EVE Online and what are its real-world parallels?

In EVE Online, anti-competitive pricing is seen when players set tax rates at zero to eliminate competition and then raise them once they are the sole provider of a service. In the real world, this practice is illegal and is known as predatory pricing, where companies lower prices to drive competitors out of business and then raise them once they have a monopoly.

What is the significance of the private trade hubs in EVE Online and how do they drive the game's conflicts?

Private trade hubs in EVE Online have become lucrative centers of commerce, leading to intense competition and conflict among the game's largest and most powerful alliances. Control over these hubs has become a major driver of wars within the game.

How does the script compare New York's financial center to the trade hubs in EVE Online?

The script compares New York's financial center to the old public trade station in EVE Online, highlighting the challenges faced by both due to high taxes and competition from lower-tax regions, such as New Jersey in the case of New York.

What is capital flight and how does it relate to the situation in EVE Online and New York?

Capital flight is the movement of wealthy individuals or businesses from one region to another to take advantage of lower taxes or better economic conditions. In EVE Online, this is seen as players moving to low-tax citadels, and in New York, it is seen as wealthy residents moving to New Jersey to avoid high state income taxes.

What lessons can be learned from EVE Online about the real-life trade hub of New York?

EVE Online can teach us that despite the challenges posed by high taxes and competition from lower-tax regions, established trade hubs like New York can still thrive due to tradition, convenience, and the willingness of customers to pay a premium for the reliability and reputation of such centers.

Outlines

00:00

🚀 Virtual and Real-World Trade Hubs

The paragraph discusses the similarities between the largest trade hub in EVE Online, a massively multiplayer spaceship game with a realistic financial system, and downtown Manhattan, the largest trade hub in the real world. It introduces the concept of in-game taxes and the strategies players use to avoid them, such as forming corporations with zero tax rates. The main focus is on the sales tax in EVE Online, which is much higher than real-world equivalents, leading to the construction of 'citadels' by players to undercut the established tax rates. This has led to a 'race to the bottom' in tax rates and the use of anti-competitive practices, mirroring real-world economic challenges.

05:01

🌐 Capital Flight and Economic Competition

This paragraph draws a parallel between the in-game economic dynamics of EVE Online and real-world economic issues, specifically focusing on New York as an example. It discusses how high taxes can lead to 'capital flight', where wealthy individuals move to regions with more favorable tax rates, such as New Jersey. The paragraph also explores the concept of anti-competitive pricing and the potential long-term effects on public services and government budgets. It concludes by suggesting that traditional trade hubs, like New York, will continue to thrive due to their established reputation and convenience, despite competition from lower-tax regions.

Keywords

💡EVE Online

EVE Online is a massively multiplayer online game set in a science fiction space setting, known for its complex and realistic in-game economy and financial systems. In the video, EVE Online is used as a metaphor to explore real-world economic concepts such as taxation, market competition, and capital flight. The game's financial mechanics are compared to those of real-world financial centers like New York City.

💡Trade Hub

A trade hub in EVE Online refers to a central location within the game where players can buy and sell goods and services. The video draws a parallel between the virtual trade hubs in EVE Online and real-world financial centers like downtown Manhattan, highlighting the similarities in economic activities and challenges such as taxation and competition.

💡In-game Taxes

In the context of the video, in-game taxes are fees that players must pay within the game on their transactions or income. These taxes are used to fund various in-game activities, such as wars. The video discusses how players in EVE Online navigate these taxes, and how they compare to real-world taxation systems.

💡Sales Tax

Sales tax in EVE Online is a transaction fee imposed on players during the buying and selling of goods. The video explains how this tax was increased from 2% to 5%, prompting players to seek alternatives to avoid paying the higher rates, mirroring real-world scenarios where businesses and individuals seek tax havens.

💡Citadel

A citadel in EVE Online is a player-constructed space station that can house market exchanges, allowing players to establish their own trade hubs with lower tax rates. The video uses the citadel as an example of how players in the game can create tax havens to compete with established trade hubs, leading to a 'race to the bottom' in tax rates.

💡Capital Flight

Capital flight refers to the movement of wealth from one region to another, typically to avoid higher taxes or seek better economic conditions. The video discusses how capital flight occurs in EVE Online with players moving their operations to lower-tax citadels, and compares this to real-world scenarios like wealthy New Yorkers moving to New Jersey for lower state income taxes.

💡Anti-competitive Pricing

Anti-competitive pricing is a business strategy where a company sets prices very low to drive competitors out of the market, with the intention of raising prices once the competition is gone. In the video, this concept is applied to the in-game economy of EVE Online, where players establish trade hubs with minimal or no taxes to outcompete traditional trade hubs.

💡Market Equilibrium

Market equilibrium in the video refers to the stable state where supply meets demand in a market, leading to a balance in pricing. The discussion in the video revolves around how the establishment of private trade hubs in EVE Online eventually reached a market equilibrium with a transaction tax rate of around 1%, allowing the maintainers of these hubs to profit while still attracting business.

💡Federal Reserve Bank

The Federal Reserve Bank is mentioned in the video as a potential solution for New York's financial challenges, suggesting that the city could benefit from a share of the profits made by the Federal Reserve Bank. This is used as a humorous comparison to the in-game strategies used in EVE Online to maintain financial stability.

💡Financial Elite

The financial elite in EVE Online refers to the group of players who have significant wealth and influence within the game's economy. The video discusses how these players responded to tax hikes by creating citadels and engaging in anti-competitive practices, which is analogous to the strategies used by real-world financial elites to maintain their wealth and power.

💡Public Services

Public services in the video are discussed in the context of how they are funded and maintained, particularly in relation to taxation. The script mentions that when wealthy individuals or businesses move to avoid taxes, it becomes more challenging for governments to fund public services, leading to potential budget deficits or increased taxes on remaining residents.

Highlights

EVE Online features a realistic financial system, making it a unique virtual world for economic study.

The game's trade hubs resemble real-world commerce centers like downtown Manhattan.

EVE Online's financial system includes taxes, which are used to fund in-game wars.

Players can avoid income taxes by joining corporations with zero tax rates.

Sales taxes in EVE Online are more challenging to avoid and are used differently from income taxes.

The game's sales tax was increased from 2% to 5%, prompting players to seek alternatives.

Citadels, player-constructed space stations, were used to create tax havens in EVE Online.

The establishment of citadels led to a race to the bottom in tax rates, with some dropping to zero percent.

In-game anti-competitive pricing strategies emerged as players tried to undercut each other's tax rates.

Forceful removal of competition through in-game violence was a solution to market saturation.

The largest alliances maintained control over private trade hubs, establishing a 1% transaction tax.

EVE Online's financial dynamics can predict real-world economic trends, such as capital flight.

Wealthy individuals in real life may move to regions with lower taxes, similar to in-game behavior.

Capital flight can strain public services and lead to increased taxes for remaining residents.

EVE Online's rapid pace allows for quick economic modeling of real-world scenarios.

Despite tax competition, traditional trade hubs in EVE Online remain dominant due to convenience and reputation.

The video game's insights suggest that traditional trade hubs like New York may withstand economic challenges.

The video concludes with a humorous suggestion for New York to profit from its Federal Reserve Bank.

Transcripts

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.