Right-Wing Mythology 101: the myth of the rich fleeing taxes

One of the right-wing’s most cherished myths is that highly progressive taxes will kill state revenues, since the rich who have the money to pay them will simply move to a more accommodating jurisdiction.

This is repeated in most conversations I’ve had with staunch right-wingers.  They cite their firm “knowledge” of this so-called “fact”.   ”I work as a CPA and I’ve seen several rich people who left because of taxes”, they’ll say. Or “My friend is a private banker and he says lots of his rich clients are moving from California because of its high taxes.”  And similar anecdotes.

Of course, there are always a few high-profile cases that seem to confirm the myth.  Celebrities like actor Gerard Depardieu who gave up his French citizenship for a Russian passport make the news.  Celebrities like golfer Phil Mickelson who huffed off a golf course saying he might move because California increased its top rate from 10.3 percent to 13.3 percent get lots of coverage.  These celebrities, of course, make many millions and 1) could afford to pay an additional 2% in state taxes but also 2) tend to develop huge egos that see themselves as the center of the universe and can easily move (since their work is not generally in a single locale).  The people’s response should be to shame them for being so greedy that they aren’t willing to contribute what for them is a piddling amount to make their state better for all its citizens–Phil M experienced a bit of that.  The government’s response should be to discount them as a major force, since they offer merely a rare example of someone with enough money, flexibility, lack of loyalty and ties to carry out a threat to move.

My personal response tends to be–well,go ahead and move, Mr (Ms) Disloyal.  You might as well move to Texas, where you can find a vast cultural lacuna along with a idiot Governor who denies global climate change, but you can always go barbecuing with George W. Bush on his ranch.  Best of luck with the lack of decent water and decent air (and decent anything else) in the future–I hear Halliburton has made quite a mess of parts of Texas…..

The media, of course, has covered these cases elaborately–but luckily at least some of the national media has paid attention to what the empirical evidence, rather than anecdotes, says about moves of the rich.  See, e.g.,  James B. Stewart, The Myth of the rich Who Flee From Taxes, New York Times (Feb. 15, 2013).

It turns out that various economists have studied the question of tax flight.  Jon Shure (Center on Budget and Policy Priorities), Robert Tannenwald (former Federal Reserve economist) and Nicolas Johnson wrote a paper in 2011 called “Tax Flight is a Myth” (executive summary and pdf available at the link).  Here are some excerpts from the summary.

The effects of tax increases on migration are, at most, small — so small that states that raise income taxes on the most affluent households can be assured of a substantial net gain in revenue.

***

Migration is not common. Most people have strong ties to their current state, such as job, home, family, friends, and community. On average, just 1.7 percent of U.S. residents moved from one state to another per year between 2001 and 2010, and only about 30 percent of those born in the United States change their state of residence over the course of their entire lifetime. …

The migration that’s occurring is much more likely to be driven by cheaper housing than by lower taxes. A family might be able to cut its taxes by a few percentage points by moving from one state to another, but housing costs are far more variable. The difference between housing costs in two different states is often many times greater than the difference in taxes.

Recent research shows income tax increases cause little or no interstate migration. Perhaps the most carefully designed study to date on this issue concerned the potential migration impact of New Jersey’s 2004 tax increase on filers with incomes exceeding $500,000. … At most, the authors estimated, 70 tax filers earning more than $500,000 might have left New Jersey between 2004 and 2007 because of the tax increase, costing the state an estimated $16.4 million in tax revenue. The revenue gain from the tax increase over those years was an estimated $3.77 billion….

The study goes on to look at several of the states that have been reported, anecdotally, to have considerable in-or out-migration due to low-or high-taxation–such as California, Florida, Maryland.  It shows that much of the rationale for movement out of California (and now, out of Florida) had to do with the exceptionally high cost of housing.  While taxes may sometimes be a factor in moves, the primary factors are housing costs, employment, weather, colleges, family, natural disasters and many other economic, democraghic and personal considerations.  In fact, the study reminds that “many of the factors deterring people from moving are most prevalanet among households with higher-than-average incomes”.

The claims underlying the tax migration myth are, in fact, ”fundamentally flawed”: they confuse correlation with causation, misrepresent irrelevant findings, and improperly measure migration.

The study provides some useful appendices,  One illustrates how studies by a consulting firm drew arbitrary conclusions about migration patterns with the Portland metropolitan area.  

Interested readers can find another study showing that higher tax rates don’t cause significant numbers of wealthy taxpayers to flee, reviewing the new tax bracket created for millionaires in Maryland, at the Institute on Taxation and Economic Policy: Five Reasons to Reinstate Maryland’s Millionaires’ Tax, ITEP (March 9, 2011).