This misses the mark completely on what the NYC building market is like.

For better or worse, building rights are extremely limited. Developers do everything they can to get more building rights. I can't think of any recent building that went up and was limited by demand for space and not by what the building code would allow them to build.

You can assume that given a different set of incentives, the buildings going up would have a different mix of units.

...yes?

Well here's the thing: if not for those extra tax shelter floors, he would not have built them at all, because no one else was willing to pay for a use of that space. Therefore, had he not built the extra floors on his theoretical tower, the space would have gone completely unused (and likely could not be used in the future).

Meanwhile, since there are people willing to pay to simply own portions of that floor, he builds it. In the future, if there is a high enough demand for that particular space, the owners of those portions of the floors could sell the floors. For those owners, they have effectively used the space on the extra floors as a property investment. However, the floors are still available in use when the time is necessary.

Comparatively, if those floors weren't built, no one would have made use of that space. If the building wasn't designed to accommodate future expansion vertically (is that even possible at that scale), then that space would have gone unused even when a demand for that space finally exists.

Thus, no one is being deprived of space because those extra floors were built. If at all, that space will be more likely to be utilized in the future, since it will have been built and ready for sale.

There is no such thing as "no one else was willing to pay for a use of that space". Maybe no one else would pay the exorbitant price they are sold for and, most likely, no one would pay that price if they had to pay reasonable property taxes on that unit. They are doing no favors to the city. Since property taxes are so low, it often pays just to withdraw units from the market to inflate prices further by creating an artificial scarcity.

It seems unlikely that any space in NYC would go unused, let alone never be used.

You would think so, and yet... http://blogs.villagevoice.com/runninscared/2012/01/new_york_...

Manufactured scarcity shouldn't count. ;-)

That space is being used to drive up the prices of the space actually being used.

Then all towers in New York should be infinitely tall

You jest, but with NY's housing situation, every tower should be as high as reasonably possible to maximum livable space.

"if not for those extra tax shelter floors, he would not have built them at all"

1. You do not know that.

2. Boo hoo. He wouldn't have built the building, but someone else would have.

So the more tax shelters, the taller the towers?