Paul L. Caron

Tuesday, October 6, 2020

Why Millionaires Don't Move Despite Higher State Taxes

New York Times Wealth Matters:  Why These Millionaires Are Staying Put Despite a New Tax on Them, by Paul Sullivan:

The reason has little to do with money. Family and community ties keep them from leaving their state.

New Jersey recently decided to impose a so-called millionaires tax — effectively increasing state taxes 20 percent on people earning more than $1 million.

Critics had an immediate, and unsurprising, reaction, arguing that such taxes will push the wealthy to move to lower- or no-tax states. But is that true?

While some wealthy people will move, proponents of these taxes argue, few will make good on the threat to move to Florida (with no state income tax) or, in New Jersey’s case, to Pennsylvania (where the state tax rate is one-third its neighbor’s rate). They argue that high earners and entrepreneurs have family and community ties that keep them from moving away.

Bloomberg Opinion:  Low Taxes Are Never Enough to Attract Wealthy Residents, by Stephen Mihm (University of Georgia):

A lot of people dream of leaving New York and California and saving a ton. But it takes more to get them to actually do it.

As high-tax states like California, New Jersey and New York contemplate spending less or taxing even more, the backlash is growing. Now wealthy residents like Jeff Gundlach are grabbing headlines for expressing a sudden interest in “low tax, well governed” states.

Could millions follow Gundlach’s lead, fostering an exodus? Since the 1950s, the question has kept countless social scientists gainfully employed.

Charles Tiebout, an economist and geographer at the University of Washington, cracked open the debate in 1958, publishing a now famous paper in the Journal of Political Economy. At the time, most economists had more or less concluded that public goods and services – schools, trash pickup, and many others – were not responsive to market forces. Unlike ordinary consumers, who can withhold purchases or only buy things when the price drops, taxpayers didn’t have that option: They pay the tax and they get the services, whether they need them or want them.

Tiebolt took issue with this consensus. He argued that geographical mobility offered a way for ordinary citizens to bring market forces to bear on the unresponsive beast of government. Tiebolt put it this way: “Just as the consumer may be visualized as walking to a private market place to buy his goods, the prices of which are set, we place him in the position of walking to a community where the prices (taxes) of community services are set.” As he bluntly summarized his argument: “Spatial mobility provides the local public-goods counterpart to the private market’s shopping trip.” ...

Academic economists embraced the idea, comparing it to the magic equilibrium they saw in the private economy. But as Tiebolt himself acknowledged, it actually wasn’t so simple. ...

[R]esidents don’t really object to taxes; they object to the inefficient use of taxes. States that are most efficient at delivering good public schools become the most attractive for prospective residents. And states that simply take a hatchet and cut everything, destroying schools in the process, like Oklahoma, are going to lose residents.

For more, see Joseph Bankman (Stanford) & Paul L. Caron (Pepperdine), California Dreamin': Tax Scholarship in a Time of Fiscal Crisis, 48 U.C. Davis L. Rev. 405 (2014)

Tax, Tax News, Tax Scholarship | Permalink


Let's see. In one corner, we have learned opinions that can never be verified.

In the other corner, Florida real estate is on fire, while NY and NY tank.

Who are you going to believe?

Posted by: Dale Spradling | Oct 6, 2020 7:45:25 AM

All it takes is a few large income people to move. I'm having to look seriously at this because I just inherited one-thrid of my father's large 2.7 mill estate. My two very rich borther-in-law both whine about Trump's tax increase on them by limiting the SALT deduction.

Posted by: Nathan Redshield | Oct 8, 2020 10:29:37 AM