June 09, 2016
Legislators in the United States have been reluctant to tax the highest income tax-payers at higher rates. “Millionaire taxes,” through the addition of higher marginal income tax rates on income over $1 million, exist only in one state, California. Connecticut taxes married couples with combined incomes over $1 million at a higher rate as well. At the federal level, the top income tax bracket starts at $415,051 for individuals and at $466,950 for couples. Despite growing income inequality and calls for the rich to pay more, there has been little to no political will to increase tax rates on incomes over $1 million.
One rationale often used to explain this reluctance is the belief that higher tax rates on the rich would lead to an exodus of high-income tax payers. When President François Hollande proposed a 75% tax rate on incomes over 1 million euros, commentators around the world predicted mass out migration of high income French citizens. The mass emigration failed to occur during the two year duration of the higher rate, but the higher tax bracket was quietly allowed to expire at the end of 2014.
Concerns about the flight of the rich are exaggerated. A new study published in the American Sociological Review by Cristobal Young, Charles Varner, Ithai Lurie and Richard Prisinzano tracked the movement of millionaires from 1999 to 2011. Using restricted IRS data on tax returns, the authors found that there is no significant trend in migration from high-tax states to low tax states. Florida, a state with no income tax, is the only state that disproportionately draws millionaires from high tax states. Other states with no income taxes, such as Texas, Nevada, and New Hampshire, show no trends of migration from high income tax states. Overall, the relationship between income tax rate differentials and migration is so low, the authors estimate that equalizing tax rates between states would only reduce migration of millionaires by 2.2%, or 250 total moves.
The authors suggest that high income households are highly embedded in their communities. They note that “In general, high-income earners are more likely to be married, to be in a dual career household … to have school-age children, to own rather than rent their home, and to own a business—all factors that discourage migration.” This theory encourages states and cities to invest in the infrastructure, like transportation, education, and housing, which are necessary for the success of businesses, rather than attracting high income households through low income tax rates.
At the federal level, policy makers should recognize that high-income households are unlikely to move to other countries as a result of high income tax rates. In contrast to corporations, which can skirt corporate taxes through inversions or other income shifting mechanisms without significant disruption, households are less likely to find employment in another country and move their children into a different education system.
