Millionaires Don’t Move to Avoid Taxes – Empty Threats

I’ve commented on this before, but it’s worth repeating.  Millionaires, despite all their bluster and threats to move when taxes are raised, simply don’t move.  It’s empty threats.  If income tax rates are raised on millionaires, they actually stay put.  This means it is indeed possible to improve state government finances by using a very mildly progressive income tax, a tax with a higher rate for very high incomes.  The evidence comes from academic studies of a near-perfect test case: New Jersey.

I’ll let Ezra Klein of the Washington Post explain:

When anyone brings up new taxes on the rich, the big objections is that such taxes end up being counterproductive because the rich simply flee to places that don’t tax them. This is, in theory, particularly true at the state level. It just doesn’t appear to be true in practice.

A few years ago, New Jersey instituted a tax that raised rates on those making more than $500,000. Predictably enough, some clever academics swooped in to test the prediction that all the rich folks would leave. So how’d it fare? Poorly:

The study found that the overall population of millionaires increased during the tax period. Some millionaires moved out, of course. But they were more than offset by the creation of new millionaires.

The study dug deeper to figure out whether the millionaires who were moving out did so because of the tax. As a control group, they used New Jersey residents who earned $200,000 to $500,000 — in other words, high-earners who weren’t subject to the tax. They found that the rate of out-migration among millionaires was in line with and rate of out-migration of submillionaires.  The tax rate, they concluded, had no measurable impact.

The study went on to conclude that “the policy effect is close to zero,” though if it exists for anyone, it’s for the over-65 crowd who live off their investments.

More on Tax Fairness – We Pretty Much Have Flat Taxes Now

In the last couple of days I’ve posted a couple times on taxes. In one post, I observed how hedge fund managers have radically lower tax rates than the most of us because of a loophole introduced in the Bush-era tax cuts.  Yesterday, I showed  graphically how average income tax rates are actually lower than most people think.  In that last post, I introduced the idea that comparing income tax rates alone isn’t adequate. Since incomes below $106,150 are fully taxed for payroll taxes (Social Security/Medicare) but income over that threshold is payroll tax-free, the gap in average tax burdern between high income and median income is much smaller than most think.  But you may be asking what about other taxes? What about property taxes and sales taxes and state income taxes?

Well it’s a big task to do this analysis, but the folks at  Citizens for Tax Justice  used 2008 data for all federal, state and local taxes combined to do the analysis.  Here’s their analysis (via New York Times – warning paywall):

It found that the average effective tax rate is 29.8 percent, and that including state and local taxes makes the tax curve look much  less steep:

Source: Citizens for Tax Justice Horizontal axis shows the income group. Vertical axis shows the percentage of income that the average member of that group pays in taxes. Taxes include all federal, state and local taxes (personal and corporate income, payroll, property, sales, excise, estate, etc.). Incomes include cash income, employer-paid FICA taxes and corporate profits net of taxable dividends.

So what do we learn from this?  It shows us that if we look at the overall tax system in the U.S., the complex patchwork system of federal-state-local income taxes, payroll taxes, property taxes, sales taxes, etc., we are pretty close to having a flat tax system.  The poorest, lowest income folks pay 18.7% of income as some type of tax while the the richest 5% do pay more, but they only pay 32.2%.

What is really stunning is how the top 1%, the really-really rich multi-millionaires actually pay less average tax rate than the those who are only rich enough to make the top 5%.  It must really be nice to be so rich that Congress tweaks the tax code just for you.

So the system is very, very mildly progressive.  A progressive tax system is one where the higher your income, the higher your average rate is.  To make a system progressive, you must have higher marginal tax rates for higher income brackets.  A regressive system is one where the effective average tax rate goes down as your income goes up.  In general, sales taxes and payroll taxes are regressive.  That’s why the overall system is relatively flat.  While the federal income tax system is somewhat progressive (although much less so since the Reagan & Bush cuts), that progressivity is offset by a regressive payroll tax and the  regressive sales taxes of various states.