Empty Threats

One argument often provided for against raising the state taxes on rich individuals and large corporations is the belief that higher taxes will simply cause them to move to low-tax states.  Now there’s data on how serious the threat to move is: not very. Yves Smith at naked capitalism writes of a study by Young and Varner. In a nutshell, using New Jersey as a test case since it raised taxes to very high levels for the rich yet is very close to neighboring states which makes moving plausible, they found the tax increase worked. A less than 0.1 response of people moving and net the tax raised a billion dollars and reduced income inequality modestly. Even stronger evidence was provided by a study of Swiss cantons. See complete comments at the link.

Quelle Surprise! Tax Increases on Rich Do Not Lead to Exodus

A solid paper by Cristobal Young and Charles Varner, “Millionaire Migration and State Taxation of Top Incomes” (hat tip Matt) helps debunk the idea that high income individuals will pull up stakes if their taxes go up. The case study is an interesting one: New Jersey’s tax increases on top earners. New Jersey made the biggest increase of all US states, and also has the distinction of having a low income tax state (Connecticut) nearby, meaning that tax-sensitive residents had an option of moving not all that far to escape the increase, which presumably would allow them to maintain family ties.

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The study results might be labeled “Millionaires are People Too.” Economists and lobbyists love to stress often base their arguments upon economic rationality and contend that everyone is out to maximize his personal bottom line. But moving is a hassle and costly, and most people’s social lives are grounded in their community and their workplace. Relocating is likely to result in a longer commute for those still employed, would cause disruption to any children still in school and would weaken many existing social relationships. ..

…The general conclusion of the paper is plausible: that moderate tax increases on the rich, even if no neighboring jurisdictions follow suit, is unlikely to lead to much in the way of emigration and will thus be a net plus in terms of tax receipts.