Individuals respond to taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. es by changing their behavior. Hence, when there are tax differences between countries, some might respond by moving to a lower-tax area. For higher-income individuals, the benefits of moving as a result of higher taxes are greater because they have more income or wealth at stake.
In a recent article published by the Journal of Economic Perspectives entitled “Taxation and Migration: Evidence and Policy Implications,” Henrik Kleven, Camille Landais, Mathilde Muñoz, and Stefanie Stantcheva review the existing research on the topic of whether and to what extent tax changes in a country influence an individual’s decision to migrate. Much of the recent research on the topic has focused on individuals with higher incomes.
The article controls for nontax country attractiveness factors such as public goods or labor market conditions by measuring the behavior of individuals within the same country over time. It focuses on the mobility of high-income people in response to top tax rates. Reasons for this include:
- Social welfare and insurance programs have higher potential to impact the decisions of those on the lower end of the income distribution.
- Top tax rates are an acceptable proxy for the overall tax rate applied to those at the top of the income distribution.
- Top rates tend to vary more over time, which allows a greater quantity of data.
Migration Response to Income Tax
When considering the impact of tax on labor income, Kleven et al. note the variance in response of domestic and foreign workers to changes in tax policy.
They take evidence from a previous 2014 study by Kleven, Henrik Jacobsen, Landais, Emmanuel Saez, and Esben Schultz which draws a relationship between a preferential Danish tax scheme targeted at foreign workers with income above a certain threshold. The number of foreign workers earning above the scheme threshold grew significantly relative to those with earnings just below it. In some industries, such as sports and entertainment, the number of foreign workers grew considerably more than others.
Another study measured the movement decisions of highly successful inventors in response to the United States’ Tax Reform Act of 1968, which reduced the top marginal income tax rate. The study suggests that the likeliness of these inventors moving in response to price changes is high relative to the general population, and that the reduction of top tax rates induced many to move to the United States.
Although the mobility response to labor tax rates is large, Kleven et al. (2014) caution against extrapolating from the cases that they cite due to the limited scope of current research. They note that individuals in lower income brackets might not respond in the same manner as those in higher income brackets, for example.
Migration Response to Wealth and Estate TaxAn estate tax is imposed on the net value of an individual’s taxable estate, after any exclusions or credits, at the time of death. The tax is paid by the estate itself before assets are distributed to heirs. es
The article also attempts to explore the mobility response to wealth and estate taxes. Wealth taxA wealth tax is imposed on an individual’s net wealth, or the market value of their total owned assets minus liabilities. A wealth tax can be narrowly or widely defined, and depending on the definition of wealth, the base for a wealth tax can vary. es are levied on the value of existing assets, and are charged annually. Estate taxes are usually levied on the net value of an individual’s property at the time of death.
The existing research on these taxes has had varied results and is even more limited than the research attempting to measure the migration response to income tax.
Two separate studies have found that higher estate and inheritance taxAn inheritance tax is levied upon an individual’s estate at death or upon the assets transferred from the decedent’s estate to their heirs. Unlike estate taxes, inheritance tax exemptions apply to the size of the gift rather than the size of the estate. es in the United States have a small but statistically significant negative impact on the number of estate tax returns filed in that state. However, in Switzerland, tax differences between cantons do not significantly impact retirement locational decisions.
Higher estate taxes have been found to have a larger impact on location decisions at the very top of the income distribution. Annette Alstadsaeter, Niels Johannesen, and Gabriel Zucman’s 2019 study, “Tax Evasion and Inequality,” estimates that the top 0.01 percent of wealthiest households evade approximately 25 percent of their tax liability. Kleven et al. (2014) argue that high evasion rates are consistent with the notion that high-wealth individuals are willing to move in order to reduce tax liability.
The evidence favors the notion that there is a migration response to wealth and estate taxes. However, the evidence for the extent of that response is small and can be inconsistent.
Overall, recent studies have found that there is a migration response to tax decisions.
Kleven et al. (2014) suggest that if tax rates are being set separately by countries, preferential tax treatment should be given to foreigners due to their higher mobility elasticity (provided that the goal is to maximize foreigner tax revenue).
The authors believe that implicit coordination goes on between countries, as evidenced by a lack of country- or jurisdiction-level tax schemes competing against each other for foreign migration by lowering rates.
However, not everyone is coordinating.
Greece has proposed a 7 percent flat income tax rate for foreign retirees who transfer their tax residence to Greece. The rate applies to all income, not just pensions. The move is aimed at expanding the country’s tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. . It has been denounced by other EU countries.
Greece is not alone. During the financial crisis, Portugal attracted foreign retirees by instituting a decade of nontaxation on pensions.
These moves show recognition by countries that tax rates can be used to lure potential migrators.
Stay informed on the tax policies impacting you.
Subscribe to get insights from our trusted experts delivered straight to your inbox.Subscribe