The myth of millionaire tax flight: Debunked

Anti-tax politicians keep repeating that, when taxes go up, rich people go elsewhere. They claim that when states raise taxes, millionaires leave in droves, fleeing to lower-tax havens. Not true, say several recent studies.

It’s an article of faith among low-tax advocates that income tax increases aimed at the rich simply drive them away, says a New York Times article, entitled  “The Myth of the Rich Who Flee Taxes:”

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.

Defenders of the millionaire-flight theory do, indeed, have some high-profile examples to cite: Tiger Woods, LeBron James, and even French actor Gerard Depardieu, who recently applied for tax-haven citizenship in Russia.  They’re hardly typical, and they represent a minuscule fraction of people who earn $1 million or more in a single year.

Closer to home, millionaire-flight theorists like to use Maryland as an example. They point to statistics that indicate that, a year after the state enacted “millionaire’s tax,” 2,324 Maryland taxpayers who had reported net taxable income of  $1 million or more in 2008 no longer did so in 2009. Anti-taxers call that an “outflow” of millionaires.

But, according to a 2011 study by the Washington D.C-based Instituted on Taxation and Economic  Policy,  the anti-taxers have it wrong. According to their study, only 360 of those who didn’t report a million dollars in taxable income in 2009 either filed only as a part year resident or did not file a return at all (because they moved out of state, died, or simply failed to file). The other approximately 2,000 still filed in Maryland, but reported incomes below $1 million. So:

While it is true that the number of tax returns filed in Maryland with net taxable income of $1 million or more declined noticeably in both 2008 and 2009, that decline has far more to do with the national recession–and its impact on household incomes–than it does with changes in tax policy.

In other words, the millionaires didn’t flee Maryland: They just weren’t millionaires any more.

A similar study in California yielded parallel results. According to Cristobal Young, a professor at Stanford University, who conducted the study:

Migration is a very small component of changes in the number of millionaires in California. While the millionaire population sees a typical year-to-year fluctuation of more than 10,000 people, net migration sees a typical year-to-year fluctuation of 50 t0 120 people. At the most, migration accounts for 1.2 percent of the annual changes in the millionaire population. The remaining 98.8 percent of changes in the millionaire population is due to income dynamics at the top–California residents growing into the millionaire bracket, or falling out of it again.

Also helping to debunk the millionaire tax-flight myth is a report from the Center for Budget and Policy Priorities. Among its major findings, the study lists these:

  • 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. And when people do relocate, a large body of scholarly evidence shows that they do so primarily for new jobs, cheaper housing, or a better climate. A person’s age, education, marital status, and a host of other factors also affect decisions about moving.
  • 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. So what might look like migration in search of lower taxes is really often migration for cheaper housing.
  • 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. It found that while the net out-migration rate of this income group accelerated after the tax increase went into effect, so did the net out-migration rate of filers with incomes between $200,000 and $500,000, and by virtually the same amount. 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, meaning that out-migration — if there was any at all — reduced the estimated revenue gain from the tax increase by a mere 0.4 percent.