Paul L. Caron

Sunday, February 17, 2013

NY Times: The Myth of the Rich Who Flee From Taxes

New York Times:  The Myth of the Rich Who Flee From Taxes, by James B. Stewart:

It’s an article of faith among low-tax advocates that income tax increases aimed at the rich simply drive them away. As Stuart Varney put it on Fox News: “Look at what happened in Britain. They raised the top tax rate to 50 percent, and two-thirds of the millionaires disappeared in the next tax year. Same things are happening in France. People are leaving where the top tax rate is 75 percent. Same thing happened in Maryland a few years ago. New millionaire’s tax, the millionaires disappeared. You’ve got exactly the same thing in California.”

That, at least, is what low-tax advocates want us to think, and on its face, it seems to make sense. But it’s not the case. It turns out that a large majority of people move for far more compelling reasons, like jobs, the cost of housing, family ties or a warmer climate. At least three recent academic studies have demonstrated that the number of people who move for tax reasons is negligible, even among the wealthy.

Cristobal Young, an assistant professor of sociology at Stanford, studied the effects of recent tax increases in New Jersey and California.  [Trends in New Jersey Migration: Housing, Employment, and Taxation. Princeton University, Policy Research Institute for the Region]  “It’s very clear that, over all, modest changes in top tax rates do not affect millionaire migration,” he told me this week. “Neither tax increases nor tax cuts on the rich have affected their migration rates.”...

“I don’t hear about many billionaires moving to Moscow,” said Robert Tannenwald, a lecturer in economic policy at Brandeis University and former Federal Reserve economist. Along with Nicholas Johnson, he and Mr. Shure are co-authors of “Tax Flight Is a Myth,” a 2011 research paper. ...

Gregory Mankiw, an economist at Harvard, said that tax rates did affect migration, at least of certain groups. “Rich people can pretty much live anywhere,” he said. “If you’re a retired person trying to decide between Palm Beach and Santa Barbara, the tax difference between Florida and California is huge. If you’re an academic choosing between Stanford and Harvard, it might be a factor.” (Massachusetts has a flat income tax rate of 5.3 percent.) ...

Low-tax advocates like Mr. Varney point to Maryland as a prime example of tax flight. Maryland created a millionaire tax bracket in 2008 with a top rate of 6.25 percent. But a year later, the state reported that the number of millionaires filing returns had dropped by a third, and that total tax revenue from the group fell despite the rate increase. After a chorus of media criticism — “Millionaires flee Maryland taxes” (The Washington Examiner) and “Millionaires Go Missing” (The Wall Street Journal) — the state legislature let the increase expire in 2011.

But a study by the Institute on Taxation and Economic Policy, a nonprofit research group in Washington, found that nearly all the decline in millionaires was the result of a drop in incomes largely attributable to the stock market plunge and recession, and not to migration — “down and not out,” as the study put it.

(Hat Tip: Mike Talbert.)

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I am one of the millionaires referenced in the article. And I left because of punitive tax rates. We are now very happy in Panama.

Posted by: Badranger | Feb 21, 2013 4:25:30 AM

As for Texas, people move there to work before they retire. There are business and employment opportunities in Texas. And I haven't read an article anywhere suggesting that, after they do retire, they move back to, for instance, New York. But looking at specific States is a little too close to taking an anecdotal approach to the issue. For a broader view, look at the last 4 or 5 decennial record of States' gains and losses of seats in the House of Representatives - and then ask yourself whether it is the States with higher or lower taxes that seem to be gaining or losing ground. Taxes are not the only factor, or course: the low tax States tend also to be the right to work States.

Posted by: Joseph W. Mooney | Feb 18, 2013 4:19:34 AM

"it's the people who are currently working that we're really trying to tax. So if they don't really flee taxes, isn't that the big point?"

Not if all the new businesses choose to open in other states. The normal decline of businesses within a state needs to be matched by creation of new businesses. The business which decides not to start up in a state is an invisible and uncounted source of job losses.

As to retiree income being taxed less, that's not the case at the state level other than for Social Security income which on average was already taxed by the state when the benefits were earned.

As to Florida vs. California, California beats Florida on everything except housing prices and taxes. Retirees must be choosing Florida for one or both of those reasons.

Posted by: AMTbuff | Feb 17, 2013 5:19:44 PM

Don't you just hate it when facts and logic and data get in the way of a good but fallacious position.

Posted by: David R. | Feb 17, 2013 3:45:35 PM

Retirees don't tend to move to Texas, do they? Florida and California are two really different places, so I think saying all else being equal is a straw man. Retirement income (and investment more generally) is heavily tax favored; it's the people who are currently working that we're really trying to tax. So if they don't really flee taxes, isn't that the big point?

Posted by: anon | Feb 17, 2013 12:56:07 PM

The article is whistling in the dark.

It's well known that retirees tend to move to Florida rather than to California. All else being equal, new businesses are more likely to locate in a low-tax state.

It's true that professionals in mid-career find it more difficult to relocate to a low-tax state, but that's a straw man. Such relocations were never a majority of the movement of jobs and wealth to low-tax states. I'm surprised that the article didn't cite Alaska's zero income tax rate as proof that low tax rates don't attract people.

Taxes aren't everything, but that doesn't mean they're not anything.

Posted by: AMTbuff | Feb 17, 2013 9:42:04 AM

Well a lot of companies definitely incorporate in Nevada or Delaware to get lower taxes. Millionaires might also have homes in other states and when taxes go up, they move. I think both arguments make sense but when taxes go up their is more of an incentive to move or commit fraud definitely.

Posted by: Ryan | Feb 17, 2013 9:39:40 AM

A couple of trends I've noticed over the past 40 years.

More business owners have multistate operations.

More business owners pay taxes in multiple states.

More business owners have residences in multiple states.

A "residence" in the north is not the same as "residency." I'm not certain the data reflects that.

Posted by: save_the_rustbelt | Feb 17, 2013 6:14:19 AM

note the story following this one . . .

Posted by: daniel | Feb 17, 2013 5:59:19 AM