Tax Competition and “Brain Drain”

May 11, 2005

Australia recently enacted tax cuts on all income levels (“Tax cuts in Australia could increase Kiwi brain drain” in the National Business Review), and by doing so has created a “brain drain” from neighboring New Zealand. According to the NBR article:

Across the board tax cuts at all income levels will make it more tempting for New Zealand workers to consider jumping the ditch. Over the last year there’s been a net loss 330 of New Zealand citizens to Australia every week.

Economists have understood this concept for years — it’s called “voting with your feet”, and it appears Kiwis are doing it in large numbers.

The events occurring down-under should make tax policymakers in the United States take notice. In a world of increasing mobilization of capital and labor, brain-power tends toward areas with friendly tax climates. Since highly educated individuals already shoulder a disproportionate share of our federal individual income tax (see Putting a Face on America’s Tax Returns), the U.S. may be at risk of experiencing its own “brain drain.”

For more on international tax competition, check out our Fiscal Fact on “The Economics of International Taxation.”

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