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

EVE Online and Manhattan: Trade Hubs, Virtual and Real#

So, you’ve got the biggest trade hub in the massive spaceship game EVE Online. Think of it as the downtown Manhattan of that virtual universe. And then you’ve got, well, actual downtown Manhattan, the biggest trade hub in our real world.

You might be surprised, but these two places, one virtual and one real, actually share a bunch of similarities when it comes to how money moves and trades happen. What goes down first in the virtual world of EVE Online might actually give us a pretty good hint about what could happen right here in the real world.

Now, we’re getting a bit ahead of ourselves. In the video we did before this one in the series, we looked into how the huge wars in EVE Online got paid for, costing hundreds of thousands, sometimes even millions of dollars. We also talked about why those wars were financed in the first place.

After that video came out, a few folks got in touch and pointed out that I missed something really interesting: the fight over in-game tax havens.

The Harsh Reality of a Realistic Economy: Taxes#

You see, when a financial system in a game is built to be as realistic as the one in EVE Online, it brings along some not-so-fun parts of real life, too. The main ones are:

Having to work hard to actually earn in-game money (called Isk).
Dealing with currency inflation.
And, yep, having to pay taxes.

So, it’s time to dig into how money works in EVE, check out the different taxes players have to deal with, find out how they try to dodge them, and then see what all of this can teach us about the future of a place like New York.

Different Taxes in EVE Online#

First off, there are the taxes we touched on in the last video. These are the income taxes that individual players pay. This money goes to the corporation (like a player-run company or guild) they belong to.

Purpose: These taxes are what fund those massive wars that even make headlines sometimes.
Player Sentiment: Because the money goes towards epic space battles, most members of these corporations are usually fine with paying them.
Avoidance (Easy Way): If a player really doesn’t want to pay these taxes, it’s pretty simple. They can just find or start a corporation that has a zero percent tax rate. Easy peasy.

However, there’s another type of tax that is way less popular among players. This is because it’s much tougher to avoid, and it doesn’t get used for fun stuff like financing space wars. These are the sales taxes.

What They Cover: Every single day, millions of trades happen in the major trade hubs across the virtual galaxy. Players buy and sell everything from basic supplies to huge bets (speculative positions).
How it Works: Every single time a sale happens, a percentage of that sale price is taken out. This amount is paid to the Secure Commerce Commission (the in-game version of the real-world U.S. Securities and Exchange Commission, or SEC).

Sales Tax Rate Hike and Its Impact#

Here’s where things get interesting with the sales tax:

Real World SEC: In the real world, the SEC is funded by a tiny fraction of a percent of stock market transactions. We’re talking maybe around $22 per million dollars in sales.
EVE Online Initially: In EVE Online, the transaction tax (sales tax) was originally around 2%. This was already quite high and was one of the main ways the game actively removes money from circulation.
The Big Increase: Things got really serious a few years ago when this tax was more than doubled to 5%.

This tax hike had two big effects:

Suddenly, a video game was getting news headlines just because of tax increases. Weird, but it happened!
More importantly, the wealthy players and financial big shots in EVE Online needed to find a way to get around these new, heavy tax rates.

The Solution: Player-Built Citadels#

The players’ answer to the high sales tax was the Citadel.

What it Is: A Citadel is a huge space station that players can build and put pretty much anywhere in space.
Market Capabilities: The biggest versions of these structures can actually host their own market exchanges, just like the main trade hubs.
How it Was Used: This meant players could build these giant stations on the edges of the existing main trade hubs and offer market services with tax rates that were lower than the new 5% rate charged in the official centers.

This worked really well for a bit, but it quickly created some new problems.

The Downside of Competition: Race to the Bottom#

Cost vs. Potential: While building a Citadel wasn’t exactly “cheap,” the cost upfront was practically nothing compared to the huge amount of money they could potentially make as a trading hub.
Everybody Joins In: Because of this, practically anyone with a few billion Isk (the in-game currency) lying around started building these structures all over the galaxy.
Free Market Effect: Through the magic of free-market competition, this led to a “race to the bottom” on tax rates in these player-owned Citadels. They started by undercutting the 5% public rate but quickly pushed rates down to practically zero percent.

Problems with Zero Percent Tax and Anti-Competitive Pricing#

Having a zero percent tax rate caused major issues for the players who wanted to run these markets:

No Revenue: At a zero percent cut, they weren’t making any money at all from transactions.
Ongoing Costs: They couldn’t afford the costs required to keep these massive stations running (they have upkeep costs).
Giving Up: Many Citadel owners simply gave up and let their stations fall into disrepair.
Holding Out: But some stuck it out. Their plan was simple: if they could just be the last one standing, they could then raise their rates back up and make a ton of money off the market.

In the real world, we have a name for this strategy: anti-competitive pricing.

What it Means: Basically, it means pricing your product or service incredibly cheaply. You do this not because it makes good business sense at that low price, but specifically to make it impossible for anyone else to compete with you. Once you’ve gotten rid of all the competition for something essential (like, say, a place to trade), you can charge whatever you want.
Real World Legality: In the real world, this kind of business practice is actually illegal. Many big companies have ended up in court over it.
EVE Online Reality: However, as we’ve seen before, EVE has a financial system that is almost totally unregulated. So, anti-competitive pricing is completely fair game there.

EVE’s Unique Solution: Blowing Stuff Up#

But there’s something else allowed in EVE that’s definitely not smiled upon in the real world: you can literally shoot down your competitors’ establishments.

The Real Solution in EVE: What this meant was that the true way to solve the market competition problem in EVE wasn’t just about pricing; it was about physically removing the competition.
The Outcome: Eventually, only the biggest and most powerful player alliances in the game were strong enough to maintain and defend these Citadel structures and get rid of rivals.
Equilibrium: A price equilibrium was finally reached, settling the transaction tax rate at around 1% per transaction.
Profitability: This 1% rate was still more than enough for these powerful player empires to cover the costs of maintaining and defending these huge facilities while making a healthy profit.
Driving Wars: In fact, running these private trade hubs became so incredibly profitable that competition over them has become a major reason behind the massive wars we talked about in the last video.

Applying EVE’s Lessons to the Real World (and New York)#

Now, for a video game, this is awesome! Spaceships blowing up other spaceships is kind of the point. But in the real world, governments probably wouldn’t be too thrilled about, say, Amazon using its delivery network to ship some heavy artillery fire over to Walmart because Walmart stole a few customers.

This means real-world competition is dealt with using more subtle methods. But it also means that competition is a constant issue for everyone – small businesses, huge corporations, and even governments.

And this is where EVE Online can teach us something useful about that real-life trade hub – New York City.

New York’s Situation: Think of New York City a bit like those old public trade stations in EVE. It’s home to one of the biggest financial centers on Earth, but it also has some incredibly high state income taxes.
The Exodus: Because of these high taxes, New York has seen an increase in its wealthiest residents moving just across the state lines to New Jersey.
New Jersey’s Advantage: New Jersey’s state income taxes are much lower than New York’s. Plus, it’s still close enough to Manhattan that commuting back and forth every day is totally doable.
NJ’s Growth: This move of wealthy New York workers across the Hudson River is part of why New Jersey has recently become the wealthiest state in the U.S.

But this situation in the real world causes a lot of the same problems we saw playing out in EVE.

Capital Flight: Moving to Avoid Taxes (or Troubles)#

This process of wealthy individuals moving to places that are more welcoming to them (often meaning lower taxes or better conditions) is called capital flight.

Definition: It’s when wealthy people (and their money) move away from a region or country.
Most Common Reason: The most common reason for capital flight is to get away from bad living conditions. Wealthy people in countries with lots of political instability or crime are often willing to spend huge amounts of money to move their families to safer, more stable environments.
- Examples: Think about people who left South Africa during certain periods, or more recently, wealthy Chinese business leaders moving to countries like Canada, Australia, and the United States.
Another Big Driver: The other major reason for capital flight is to avoid tax. It’s important to note that this is less common globally, especially when it means moving from one country to another.
Moving States is Easier: But moving from one state to another, especially when that other state is only a few miles away like New York to New Jersey? That’s a totally different story.
- It’s much easier.
- You don’t usually need to change jobs.
- You can still be near your friends and family.
- Your kids might even still be able to attend the same schools.

The Problems Capital Flight Creates#

So, people moving just outside a big commercial center to pay less tax sounds familiar, right? And the problems it causes are familiar too.

Funding Public Services: For starters, it becomes much harder for governments to pay for and maintain public services (like schools, roads, police) when the people who are using those services are paying their taxes in a different state.
Budget Issues: This forces governments to either:
- Run short on money (budget deficits).
- Or, tax the residents who do stay even more to make up the difference.
Tax Spiral: But if they tax the remaining residents more, that only makes more people want to leave to avoid those higher taxes. It can become a vicious cycle.

EVE as a Glimpse into the Future#

Of course, the backup plan of just starting a war with your competition probably wouldn’t go over too well here in the real world. But that’s okay, because EVE can also give us a peek into what happens when this situation (like the New York to New Jersey move) is just left to play out over time.

Everything in this video game happens much, much faster than it does in the real world.

Real World Speed: Moving from New York to New Jersey might take a family months of planning – selling their old house, buying a new one, convincing their spouse, and all that other fun stuff.
EVE Speed: Moving across borders (or regions) in EVE might take just a few minutes of travel time in a spaceship.

And what we’ve seen from this miniature model of the real world (EVE) is pretty much what you’d expect:

Main Hub Dominance: Most business still gets done in the old, main trade hubs (like New York).
Revenue Loss: Sure, the main hub has lost some trading revenue to the competitors with lower taxes (like New Jersey).
Customer Inertia: But at the end of the day, customers from all over the galaxy (or maybe just the planet) know that the main hub is the place where big business happens. It’s a big ask to convince those same customers to go out of their way just so you (the seller) can enjoy slightly lower taxes.
High-Value Deals: Of course, for really expensive or high-value deals, you might pass some of those tax savings along to the customer, which can draw them in.
Tradition and Convenience Win: But more often than not, being used to a place (tradition) and how easy it is to trade there (convenience) are more important than saving a tiny bit on taxes (marginal savings).

Good News, New York!#

So, here’s the good news for New York: according to the spaceship video game model, you’re probably going to be alright! You can breathe a sigh of relief.

And even if that all fails, maybe New York can fix all its money problems just by taking a cut of the profits its local Federal Reserve bank makes.

If you’re curious about that, go check out our video on how the Fed became the most profitable thing ever to find out if we should actually be worried about that. Or, if that sounds a bit too scary, you can always check out our other video first on how wars in EVE Online get financed.

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