The tax flight myth

Gérard Depardieu, tax exile, showing off his new Russian passport in Saransk,
6 January 2013 (Photo: Krasilnikov Stanislav/Itar-Tass/ABACA)

[update below]

The NYT has a bull’s-eye article debunking the notion that countries—or American states—with high tax rates are witnessing an exodus of high earners (the Ayn Randian right’s “makers”) to countries—or American states—with lower tax rates. The notion of tax flight, which is tenacious among neoliberals and the right, is fueled whenever a high-profile rich French businessman or celebrity decamps to Belgium or Switzerland—or in the case of Gérard Depardieu, to that land of low taxes and economic freedom, Russia—, or when the like happens in the US, e.g. with CEOs apparently fleeing high tax California to lower tax states (as Walter Russell Mead gleefully reported on his blog the other day). But as the NYT asserts, it’s all a myth. Money quote

It’s an article of faith among low-tax advocates that income tax increases aimed at the rich simply drive them away. As Stuart Varney put it on Fox News: “Look at what happened in Britain. They raised the top tax rate to 50 percent, and two-thirds of the millionaires disappeared in the next tax year. Same things are happening in France. People are leaving where the top tax rate is 75 percent. Same thing happened in Maryland a few years ago. New millionaire’s tax, the millionaires disappeared. You’ve got exactly the same thing in California.”

That, at least, is what low-tax advocates want us to think, and on its face, it seems to make sense. But it’s not the case. It turns out that a large majority of people move for far more compelling reasons, like jobs, the cost of housing, family ties or a warmer climate. At least three recent academic studies have demonstrated that the number of people who move for tax reasons is negligible, even among the wealthy.

The NYT article links to the 2011 report by the Center on Budget and Policy Priorities, “Tax Flight Is a Myth: Higher State Taxes Bring More Revenue, Not More Migration,” which is a must read on the subject. As for those CEOs and celebrities who do move for tax reasons, all one can say is good-bye and good riddance! Bon débarras ! The number of tax exiles from France is insignificant in any case—a few hundred a year—, as the graph below indicates. A drop in the bucket.

As for those apparently fleeing California, the map below, which dates from 2010, shows both the influx into and outflow from the L.A. area, the latter of which is not only to lower tax states but also to other parts of California and the west coast. In commenting on the map, the right-wing nativist Peter Brimelow speculated that the driver of the exodus from the L.A. could be immigration rather than taxes (of white folks fleeing Latinos and Asians), and which he does suggest in the case of low tax south Florida (next map down). All goes to show that people of an ideological bent will read into data what they want to read into it.

Back to Walter Russell Mead, he had a blog post last week extolling an article in the conservative City Journal on the economic boom in Texas and all the high-skilled workers who are moving there. Mead, who is on a crusade against something he calls the “blue model,” favorably compares Texas to California. Well, if the influx of highly educated workers into Texas continues over the coming years, this will be a positive development in my view, as it will hasten Texas’s transformation from a deep red state into a competitive one and, by the middle of the next decade, into a safe blue state. Bring it on, I say!

UPDATE: The Feb. 19th WaPo has an article entitled “Will higher taxes on the rich derail California’s economic comeback?” Answer: No. Money quotes

Yet many economists and some young executives in the state say they don’t worry about that high [income tax] rate chilling growth. Other factors loom much larger for California’s business and economic health, they say, including whether the state can maintain deep pools of highly skilled talent and, in complicated but important ways, the renewed upward march of housing prices in the Bay Area and beyond….

Ask [Sifteo co-founder Dave] Merrill what he worries might disrupt his business in the next year, and he ticks off a list: Political changes in China that might raise the cost of manufacturing products there. A plunge in consumer confidence in America. A rapid decline of big-box retailers that stock his products.

He does not worry, he says, about tax increases…

…many Golden State economists say the tax hikes won’t drive away companies. A Stanford University study last year found no link between tax rates and wealthy Californians’ decisions to leave the state, and the state has a history of tax increases not affecting growth, including under a Republican governor — Ronald Reagan.

“The evidence is, from past tax increases, that it makes very little difference,” said Jerry Nickelsburg, a senior economist at the UCLA Anderson Forecast, who predicts only a slight scrape to state growth from the new rate increases. Since 1967, he added, tax hikes and cuts in the state have had a “second-order effect” on growth.