Science Friday I: Taxes and Galtian Motion

One of the most common arguments against millionaire taxes takes a hit in the National Tax Journal [pdf]:

Drawing on the NJ-1040 microdata — a near census of top income earners — this study examines the impact of a new progressive state income tax. Do progressive state income taxes cause tax flight among the wealthy? The New Jersey millionaire tax experiment offers a potent testing ground, given the magnitude of the policy change and the relative ease of relocating to a different state tax regime without leaving the New York or Philadelphia metropolitan areas. Using a difference-in-difference estimator, we find minimal effect of the new tax on the migration of millionaires. Using the 95–99th percentiles of the income distribution as a “non-33 taxed” control group, we find that the 99th percentile (those subject to the new tax) show much the same trends in migration patterns over time. There are small subsets of the millionaire population that are more sensitive to state taxation. Nonetheless, the broad conclusion holds even when looking at the richest 0.1 percent of households.

These findings mesh well with existing research showing that the migration response to marginal tax policy changes is generally quite small. Our work also addresses the question, “are the rich different?” (Alm and Wallace, 2000), and follows the recommendations of Piketty and Saez (2003) to focus on the behavior of the top 1 percent (and even top 0.1 percent) of income earners. We conclude that, at least in terms of the migration response to state income taxes, the rich are not different — they seem to have much the same non-response as the general population.

In other words, like everyone else, the rich bitch and moan about the taxes they pay but they don’t generally move out of state. The one group that is more sensitive is the retired, but if I understand the study correctly, the outflow of the retired was compensated for by the creation of new millionaires.

I also found it interesting that there’s an established body of evidence that marginal tax rates don’t cause migration. Funny how we never hear about that when conservatives are bloviating about taxation. If anyone who knows the literature could point to a good review paper, I’d be happy to read it and post about it.

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29 replies
  1. 1
    burnspbesq says:

    If it’s in the NTJ, believe it. The NTJ is almost unique in my world: it’s not a law review, it’s serious multi-disciplinary scholarship.

  2. 2

    Once Megan McCurdled gets a new calculator she’ll prove this study wrong by offering an unsubstantiated anecdote or two about people she knows who moved when their taxes went up.

    But actually this makes sense if one realizes the rich are human and not some sort of semi-divine creature. Plus, when you own a custom built 15,000 sq ft home sitting on 8 acres of land, you really can’t take it with you when you go. To say nothing of friends, neighbors, etc.

    But then, the people who claim the rich will run away and hide if their taxes go up imagine the rich live in self-contained enclaves as seen on Dallas.

  3. 3
    Superluminar says:

    One of the most common arguments against millionaire taxes takes a hit

    Unfortunately this is a “hit” it has been taking for quite some time, but with no effect on conservatives or libertarians (but I repeat myself) because they simply do not care about evidence.

  4. 4
    Steve M. says:

    Limbaugh and this guy left New York in response to tax increases. Both of them are self-important right-wing blowhards with a media platform.

    A right-wing radio DJ trying very publicly to prove a point and a failed Rick Scott wannabe who was pissed that being a billionaire never helped him become governor. Who else? Who else responds this way?

  5. 5
    aimai says:

    @Steve M.:

    Limbaugh left New York but I really would be interested to see whether he really “left” or whether he spends nearly as much time there in hotel rooms. Still, as you point out, its a very small sample indeed.

    aimai

  6. 6
    pointer says:

    Why would they move? It took them years to work their way onto the right cocktail party circuit.

  7. 7
    pointer says:

    Of course, if everyone on the cocktail party circuit moved at the same time … that could work. Like that Simpsons episode where the entire town of Springfield relocated because of the growing trash problem.

  8. 8
    bcinaz says:

    I for one would like to raise taxes on the wealthy as a galtian incentive. How much better off would the world economy be if the banksters had gone galt before their creativity streak which resulted in the world’s economic melt-down?

  9. 9
    Napoleon says:

    I did not read the link, I will later, but it seems to me that even if you lower your states taxes you have two other issues that you would need to address to make yourself competitive. My understanding is that the two states that people locate too are NV and FL which have no income tax. So if you are dealing with people who have a job where they can relocate anywhere someplace that does not have bad winters is going to have a huge advantage. On top of that I know that FL has an incredibly loose homestead exemption law for purposes of attachment and bankruptcy. So if you have a billion dollars and want to shield 150 million on the off chance you land in bankruptcy, you buy a house in the Keys that is worth that much and declare FL home. In Ohio the homestead exemption is something like $15k. So unless your state is also willing to let the rich shield that much money from their creditors a place like FL has a huge advantage.

  10. 10
    jinxtigr says:

    So, brownian motion is, when heat rises you bounce around more aggressively- but Galtian motion is, when taxes rise, you tell your lawyer to go pick up your Social Security check for you? :D

  11. 11
    RosiesDad says:

    In other words, like everyone else, the rich bitch and moan about the taxes they pay but they don’t generally move out of state.

    And my guess is that they would be even less likely to leave the country in the event that the marginal tax rate structure was altered to increase their liability. But they will continue to spend millions on lobbyists to ensure that we don’t have that conversation.

  12. 12
    Omnes Omnibus says:

    @jinxtigr:

    Galtian motion is, when taxes rise, you tell your lawyer to go pick up your Social Security check for you?

    Not even that, Social Security is generally direct deposited these days.

  13. 13
    liberal says:

    If you tax land heavily—and commercial land is often in the hands of the wealthy—the rich can’t take it with them.

  14. 14
    liberal says:

    I did not read the link, I will later, but it seems to me that even if you lower your states taxes you have two other issues that you would need to address to make yourself competitive.

    Actually, it’s pretty easy to make yourself competitive and have plenty of revenue: tax land heavily and cut taxes on sales and income. It makes no difference to _future_ landowners, except for people who are in it for a capital gain, because the price of land (which is the NPV of future post-tax land rent) will go down commensurately. Of course, current landowners would take a bath.

  15. 15
    Napoleon says:

    @liberal:

    Personally I am against an idea like that because the tax then falls on a group of people that is likely not coincident with the richest people in the state.

  16. 16
    JGabriel says:

    mistermix:

    I also found it interesting that there’s an established body of evidence that marginal tax rates don’t cause migration.

    Was that ever a real concern? I thought the argument was that the rich would move businesses and jobs to other states or countries, not themselves. Though I kind of wish the greedy, whiny ones would move to other countries, like Sudan.

    .

  17. 17
    JGabriel says:

    @Thoughtful Black Co-Citizen:

    Once Megan McCurdled gets a new calculator she’ll prove this study wrong by offering an unsubstantiated anecdote or two about people she knows who moved when their taxes went up.

    Or an order of magnitude error that she’ll correct 8 years later, but only after being rudely hassled about it by a picky, pedantic, college-teaching, commie mathematician.

    .

  18. 18
    ericblair says:

    @JGabriel: Though I kind of wish the greedy, whiny ones would move to other countries, like Sudan.

    They won’t, because they do appreciate not living in a third-world shithole where they have to worry about being kidnapped or shot anytime they pop out of their high-walled compounds. They just don’t want to pay for the privilege.

  19. 19
    Cliff says:

    It really pisses me of when people who EARN a million dollars a year – nearly $4000 per trading day are called ‘millionaires’

    a millionaire is traditionally someone who HAS a million dollars.

  20. 20
    JGabriel says:

    @liberal:

    Actually, it’s pretty easy to make yourself competitive and have plenty of revenue: tax land heavily …

    I’m with Napoleon on this one, high annual (or monthly) property taxes hurt poor and middle class land owners. I’m against regressive taxes in general, though Krugman makes a good case for a VAT tax — that it works well in European social democracies because it takes upper class whinging off the table, and allows society to focus on the best way to build/maintain infrastructure and the safety net instead.

    .

  21. 21
    Breezeblock says:

    FYI, here’s a link to the paper at Princeton.

    http://www.princeton.edu/~cris.....ration.pdf

  22. 22

    […] But beyond the goal of reducing personal embarrassment, the more that the independent authority of scholars and scientists can be diminished, the easier it becomes for ever more risible statements to take on the status of holy writ.  After all, we all know that progressive taxes infallibly drive away the rich…Right? […]

  23. 23
    burnspbesq says:

    @JGabriel:

    An observation and a joke.

    It doesn’t really matter whether a particular tax is regressive. What matters is whether the aggregate tax burden is regressive.

    Q: When will the United States get a VAT?
    A: When Republicans figure out that it’s regressive and Democrats figure out how much money it can raise.

  24. 24
    RosiesDad says:

    @Cliff: Not to split hairs but what proportion of individuals who earn over a million dollars a year actually have a net worth less than a million dollars? (Which would be your definition of “millionaire.”)

  25. 25
    Crusty Dem says:

    @liberal:

    Yeah, we call that the “Texas Solution” (there are homes in suburbs there where your property tax will nearly match the rest of your mortgage payment). Not so great, and once you go down that road, there’s no turning back.

  26. 26
    Kryptik says:

    In a world where millionaire and lobbyists tend to spend hundreds of millions to push back against policies that would probably cost them less than what they invest into lobbying and campaign mucking, this won’t do a damn whit. Sad fact of the matter. It’s not the actual money they care about, it’s conditioning the rest of society to believe that the rich white corporatists are truly the most aggrieved and discriminated group in America, and in that scope, they’ve been depressingly successful beyond sense.

  27. 27
    Cliff says:

    @RosiesDad:

    lots of people have a million dollars and consider themselves millionaires and think their taxes are going up even though they don’t Earn remotely enough to be affected by taxes that only affect 500,000+/year earners.

  28. 28
    New Yorker says:

    In other words, like everyone else, the rich bitch and moan about the taxes they pay but they don’t generally move out of state.

    Because, like everyone else, they take advantage of the benefits of living in said state. Is some hedge fund manager really going to pack up his belongings in Alpine, NJ and re-open his fund in Clarksdale, MS because the tax rates are lower? Good luck finding the Harvard MBAs who need to staff your company when you’re located in the sticks instead of Manhattan.

    Retirees are a different breed because a) they’re not tied to a specific job or industry b) they’re on fixed incomes so the tax rates probably make more of a difference and c) New Jersey is cold in January and Florida is not, so they’d probably be inclined to make that move regardless of the state income taxes (or lack thereof).

  29. 29
    Herbal Infusion Bagger says:

    “Good luck finding the Harvard MBAs who need to staff your company when you’re located in the sticks instead of Manhattan.”

    In my experience, not being able to find Harvard MBAs would be a good thing. 1/3 of Harvard MBAs are hard-working folks with lightning minds, but 2/3 are talentless untrustworthy mediocre sociopaths who rely on their alumni network to jump from job to job before their screwups catch up with them.

    I’d happily work for or hire and MIT MBAs: everyone I’ve met from that program has been smart and easy to work with if you can keep up with them. Stanford, UCLA, Berkeley, Columbia, even (despite McArdle’s damage to the brand) U.Chicago MBA have overwhelmingly been impressive also. Haven’t worked with Wharton folks so can’t comment on them.

    But a job or project where I have to work with a Harvard MBA is usually one I’d turn down, as life’s too short to spend it plucking cutlery out of your back.

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