There have been a number of news stories over the last two years about how the wealthy are fleeing states which have increased taxes on the highest tax brackets.
I’ll show you this line of thinking is not borne out by the facts, and is irrational to boot.
Here’s an example; a new story from the Wall Street Journal – titled “Millionaires Fleeing Taxes” (August 7, 2012).
The description of the video interview with the reporter (Arden Dale) states “When states raise taxes millionaires move out.” And the interviewer starts the piece by declaring, “Millionaires are fleeing from taxes!”
Wow, that sounds serious, and certainly very definitive. Let’s learn more.
Interviewer – “So tell us, where are the millionaires going?”
Ms. Dale – “People don’t want to be taxed… but when we looked the actual numbers, the actual studies of whether ‘Millionaire Flight’ occurs, what we found was that there is no really great statistical data that shows that it does.” (Note: while this is being said, a banner on the screen reads “Millionaires moving to avoid taxes.”)
Ms. Dale continues, “Um, there’s an old study that a lot of people cite that shows that some elderly wealthy people move, but not in huge numbers, to get away from taxes, when a state raises taxes.”
The reporter also says was told by financial advisors that they have “a story, or a couple of stories” about helping people to move to another state to get away from high state taxes. She did not state that these were millionaires, and that these moves are the result of an increase in marginal taxes. “It’s a little bit of a funny picture. It does seem to be happening, but how much is hard to actually prove.”
She goes on to say, “And it’s not always about taxes” (when people move).” It’s also about “real estate values, family, and values (lifestyle)… it’s combined.”
Okay, so what we learned is that there is no data showing that “Millionaire Flight” occurs, but there is anecdotal evidence that old rich people might move, and which might well be due to considerations other than taxes. This is certainly a different story from how this piece was positioned, one might say deceptively.
A similar story broke in 2011, when a study from the New Jersey Treasury Department declared that 25,000 taxpayers left the state between 2004 and 2009, when the highest tax rate was increased from 6.37% to 8.97%, and cost the state an estimated $3 billion in revenue.
But some economists questioned the study’s conclusions, pointing out that the IRS migration data used included all tax brackets, not just the wealthy.
“Ultimately, the data they use doesn’t address the question they want to be addressing,” said Charles Varner, a sociology professor at Princeton University, as reported in the Wall Street Journal.
Earlier in 2011, Mr. Varner and Cristobal Young released their own study which concluded that migration patterns of New Jersey millionaires were essentially the same as that for less-wealthy residents. The higher income tax rate had no measureable effect.
Sometimes I like to step back from the data and apply a little real-world logic.
This has become a political issue, which conservatives are using to show the disastrous effects of raising taxes. What they would like us to believe is that the wealthy are very sensitive to paying an extra one or two percent of their taxable income, so much so that they will uproot their home to seek a less-costly state.
This argument just doesn’t make sense.
The rich use their money to achieve a higher quality of life. The wealthy eat at better restaurants, buy more expensive cars, have bigger homes, and even wear nicer clothing. If they were so sensitive to higher costs of living, they would be seeking a more frugal lifestyle by cooking at home, downsizing their home, driving a Honda instead of a Mercedes (or two, or three), and enjoying the thrill of yard maintenance.
Do you know any multi-millionaires choosing to live a middle-class lifestyle? Me neither. It seems that people always spend as much as they can afford on their homes, cars and amenities.
It’s all about quality of life, and the wealthy have the resources to choose their own best place to live, which is really the ultimate luxury. They are not going to incur the significant expense and disruption to relocate their home, if it currently fulfills their needs and desires. The wealthy will continue to seek quality, and a higher tax rate is part of the cost for that luxury.
If the argument is valid that millionaires will leave a state to reduce their tax burden, then surely they must be flocking to places with the lowest tax rates. New Mexico tops the list of states with the greatest reduction in top marginal tax rate between 2000 and 2007, nearly 3%. Now, I don’t know how many more millionaires have now relocated to New Mexico to save on taxes, but I bet it’s not very many. (I’ll let you know when I run the numbers.)
Using the same logic, New Jersey, New York, District of Columbia and California (with the highest marginal tax rates) must be losing their millionaire residents to states like Wyoming, South Dakota and Alaska, which have zero income tax. Sorry, I don’t think so. People usually have compelling reasons to locate and stay in a high-tax state, and are not likely to find these assets in other states, regardless of a lower cost of living.
Oliver Wendell Holmes is quoted as saying, “I like to pay taxes. With them I buy civilization.” He recognized that taxes provide resources for state and local governments to deliver essential services to their residents. This is part of a civilized society.
These days, many fail to realize is that there is an optimum balance between taxes levied and services provided. That balance is a matter of continuing debate, but we can’t expect government to slash taxes indefinitely and still provide the services and infrastructure which contribute to an acceptable level of livability for its residents.
The wealthy gladly pay a premium to drive a Mercedes or Porsche, rather than a Toyota or Honda even though they are exceptionally competent vehicles. In the same way, they are not going to sacrifice their quality of life to save a small portion of their income by fleeing to some state that is offering a “discount government.”
The rich will continue to seek out quality, and sometimes higher taxes will buy that quality. The wealthy recognize you usually get what you pay for.