The Myth of Tax Exiles

by Giles Cadman

The New York Times has a long article on the myth of rich people fleeing from high tax regimes. I am not sure I agree with it, as I know many people who have left high tax areas. The difference between anecdotal evidence and broad academic research can be huge though.

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.

It appears that different groups are affected differently by tax rates, and migrate accordingly.

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.)

One of the interesting examples put forward  is Maryland, which lost millionaires and lowered its tax take by increasing its top tax rate.

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.

Simple metrics are not enough to make judgments on the effectiveness of a policy, as this example shows.

In 2009, just 364 people in the millionaire bracket moved from Maryland or died (the data didn’t distinguish between the two) — about the same percentage who disappeared in 2007, before any tax increase. And in 2009, more than 1,500 taxpayers entered the millionaire rolls, either because they earned more or moved to Maryland that year. That data “directly contravenes the notion that changes in tax policy were discouraging the affluent from working hard and earning substantial sums of money, or driving them out of the state altogether,” the study concluded.

Professor Young said his study looked at every millionaire tax record filed in California over the last 20 years, and “neither tax increases nor tax cuts on the rich have affected their migration rates.” He said that the two major tax overhauls before the recent increase didn’t have any effect on migration rates of millionaires. “Among the very richest, people making more than $2 million, out-migration actually declined slightly after the 2005 millionaire tax,” he said.

 

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Categories: Fine Wine

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