Taxation and International Migration: Do High Tax Rates Cause Brain Drain?

November 2, 2015

Earlier this month, three economists released a new paper: “Taxation and the International Mobility of Inventors”. The paper has empirically confirmed that top marginal income taxes will chase away superstar inventors: highly-skilled contributors to the economy who have extremely valuable patents.

We keep hearing anecdotes on wealthy celebrities fleeing high tax territories for tax reasons. This has ignited heated public debate regarding taxation and the mobility of high earners. However, the academia has remained relatively silent on this issue due to the lack of international data.

Based on a unique data set for inventors from 8 OECD countries, the study finds that “there is negative correlation between the top marginal tax rate and the share of top quality foreign investors who locate in a country, as well as the share of top quality domestic inventors who remain in their home country.” The top 1% inventors are significantly affected by top marginal rates when deciding where to reside. Among these top 1% superstars, the foreign inventors, or ones who work for multinational companies, are more likely to take advantage of tax migration than domestic ones. The authors also point out that the cluster effect of research activity in a given company can dampen the impact of taxation.

High-skilled inventors are more mobile than general population in the literature; at the same time, they are key determinants of economic growth. As the authors highlighted, “this paper speaks to the relation between taxation and growth.” In the U.S., we have a high-skilled immigrants accounting for roughly 25% of the labor force in innovation and entrepreneurship. We have to make sure our tax climate is attractive enough to those economically innovative agents.

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