Is Tax Migration a Myth?

 
 
February 26, 2013

With the recent comments from Phil Mickelson and the emigration of French actor Gerard Depardieu and other celebrities for tax reasons, people have been abuzz about millionaires fleeing high tax states in favor of low tax states. New York Times writer James B. Stewart, however, thinks millionaire migration due to taxes is a myth. Unfortunately, he greatly simplifies the issues, while ignoring ample evidence that migration is in fact happening. While the studies and evidence Mr. Stewart cites are interesting, he ignores how high tax burdens tend to slow economic growth and immigration over the long run.

It is no coincidence that the states that are famous for their “millionaire taxes” are also famous for their overall high tax burden. These tax burdens have persisted for decades in some states.  New York, New Jersey, and California, with high personal and corporate income tax rates, have routinely been among the states with the highest overall tax burdens on businesses and individuals. Small changes to the top marginal income tax rate may not be the biggest factor in a person’s move. However, when it comes time to move for retirement, or to relocate a business, high tax states are much less desirable compared to states such as Nevada and Wyoming with no personal or corporate income tax.

IRS data indicates a migration trend from high tax states to low tax states. Between 1999 and 2010, high-tax New York, New Jersey, and California lost about 1.2 million individual taxpayers and more than $97 billion of personal income.  This does not include the corporate losses.  Meanwhile, low-tax Nevada, Wyoming, and South Dakota –not known for their magnificent climates – gained about 172 thousand individual taxpayers and $15 billion of personal income during the same period, again not including corporate losses.  People are moving to these states and their money is following. Certainly this trend is not a coincidence.

There is one point that Mr. Stewart is right about: one of the main reasons people move is because of job prospects. However this cannot be divorced from a state’s high tax burden. Most academic studies on the subject have found that high and progressive income taxes are related to slower economic growth. For instance, a forthcoming paper by Mertens and Ravn in the American Economic Review finds that a one percentage point cut in the average personal income tax rate raises real GDP by 1.4 percent in the first quarter and 1.8 percent in the next three. Higher taxes may not have a huge immediate effect on migration, but their negative effect on the economy will eventually drive the jobs and the job seekers elsewhere.

Mr. Stewart is off the mark if he believes he has uncovered a myth. Besides the posturing of celebrities, no one claims that at the very moment someone whispers “tax increase” one thousand millionaires head to the border. What really happens is that these higher tax burdens cause wealth and income to flee to states and countries with lower burdens and higher economic growth over time. High-tax states such as Vermont, Michigan and Missouri have not been magnets for jobs over the long run. Look over at Europe, which is once again scaring investors. It is a continent with excellent climate, culture and an educated workforce, but its high taxes and spending have stalled population and economic growth for a decade or more. America will go that way if we continue down the same path, driving out investment, businesses, and jobs.

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