Something I missed earlier

To better understand elite migration across state lines, I analysed tax return data from every million-dollar income-earner in the United States. The dataset includes 3.7 million top-earning individuals, who collectively filed more than 45 million tax returns over more than a dozen years – showing where millionaires live and where they move to.

And it turns out that place still matters for the rich – much more so than we might think.

Only about 2.4% of US-based millionaires change their state of residence in a given year. Interstate migration is actually more common among the US middle class, and almost twice as common among its poorest residents, who have an annual interstate migration rate of 4.5%.

This is, of course, what we could expect. It’s easy to move when you have very little, or when you’re young. It gets harder the older you get. And incidentally, as he finds, when people do move then it’s to the sun, and not for low tax. Again, there’s nothing new in that.

But what does that mean? It means we can tax wealth because the rich stay put.

And we can have progressive taxation.

The arguments over: the facts are what matters. Now let’s get on with it.

The Senior Lecturer needs to add one more thing. If you itemise your tax return, something you’d expect high earners to be doing, then your state and local tax bills are deductible from your federal one. Meaning that tax rates don’t vary all that much even across the different taxing jurisdictions in the US. It looks like this might get killed in the current tax bill:

Will the Republican tax bill devastate America’s bluest states? That’s the impression you’d get from two recent op-eds in the New York Times, the first by a pair of liberal academics, and the second by a conservative policy analyst, both of which castigate Republicans for drastically shrinking the state and local tax deduction, also known as SALT. Ray Dalio, the legendary hedge fund investor, argues that curbing SALT will cause more millionaires and billionaires to flee high-tax states for low-tax states, thus causing a severe revenue crunch in the former.

Hmm, maybe taxes do make people move?

26 thoughts on “Something I missed earlier”

  1. If 2.4% leave in any given year now, in 10 years thats more than a fifth of the original population gone. Add in extra taxation driving that 2.4% higher and you soon won’t have any wealth left to tax, even on these figures.

    And anyway, if 2.4% of rich people move overall, doesn’t that mean that more than that % could be moving from high tax to low tax jurisdictions? Because the ones already in low tax jurisdictions are even less likely to move? If State A has 1000 wealthy people and a tax rate of 10% and State B has 1000 wealthy people and a tax rate of 20%, and 50 people per year move from B to A (ie 5% of B move for tax reasons) the overall moving rate across both states is 50/2000 = 2.5%.

  2. Do corporate taxes hinder innovation?

    In this paper we examine staggered corporate income tax changes at the US state level over 1990–2006, and find that higher corporate taxes indeed reduce future innovation by affected firms. In particular, our conservative estimates imply that about 67% of treated firms affected by a tax increase file for approximately one fewer patent following the increase, as compared to a neighboring firm exposed to similar economic conditions but not affected by any tax change. This is approximately a 5% change in patenting activity. To allow for asymmetric effects, we consider tax increases and decreases separately, and find that most of this effect comes from the increases.

  3. In any case, you need to be counting the money, not the numbers. In any progressive tax system, a large proportion of the tax take will come from the rich. So the rich upping & leaving has a disproportionate effect on the tax take.
    Just looking at the figures the Ely idiot is brandishing, the 4.5% of the poorest moving would likely be a net benefit to the state concerned. They’ll be getting more out of spending than they’ll be putting in. Somewhere between the poor & those millionaires will be the people whose tax payments broadly balance the benefits they receive. Their moving is revenue neutral. It’s the extremes have the greatest influence.

  4. Conversely, many people are prepared to pay more to live in nice places. The coastal parts of California are very nice places to live, despite the high taxes: the temperatures are mild, the sun always shines, it really is very pleasant. Move to low-tax Arizona or Texas and you’re stuck indoors with the air-con running at full blast all day. Inland California is the worst of both worlds: high taxes and unpleasant weather.

  5. Bloke in Tejas in Normandy

    Andrew M – “Move to low-tax Arizona or Texas and you’re stuck indoors with the air-con running at full blast all day.”

    Well, not true for Texas. It *is* true for July, August and September in at least the Austin region (although the AC certainly doesn’t run “full blast” – the house is quite well insulated), but autumn, winter and spring can be lovely, weather-wise. And the summer month weather is why I’m in Normandy (or based there) summertimes. (Why I’m here at the moment is more to do with installing much-needed new external doors on the cottage)

  6. So no-one moves to Monaco, then? It just happens to generate a disproportionate number of millionaires. I see…..

  7. Joel Kotkin, among others, points out that people working in the so called “intangible” industries, of finance, media, entertainment, academia, law, and technology often are quite progressive politically. These industries have relatively little reliance on blue collar workforces beyond subcontracting out the janitorial service or perhaps some stage hands in the case of entertainment. Those working in “tangible” industries of resource extraction, energy, logistics, manufacturing, etc., tend to be more conservative. These industries also have a relatively heavy reliance upon blue collar workers though they are led by well educated managers.

    You could make a reasonable observations that those in the intangible industries have shown a willingness to tax themselves quite heavily provided they get the policies enacted that will inhibit those in the tangible industries. Certainly you’ll find many in the latter who feel the former are waging war on them.

  8. Just because Republicans hold a House of Representatives majority of 240 to Democrats 193 (as of DEC5, resignations have reduced the sum from the full 435 members) doesn’t mean the state tax deduction from federal income will go away

    New York has 9 Republican Reps, New Jersey have 5, California has 10. Those guys will not vote to eliminate the deduction, not if they want to get re-elected.

    If those high tax state Republicans shift and vote against their party caucus, the bill to eliminate the deduction will lose by one vote

    this will get interesting

  9. I can’t see why the Republicans didn’t get rid of the State tax deduction years ago.

    Why should Federal taxpayers subsidise high-tax States? Why should high State income taxes basically be a tax grab from Federal funds?

  10. Taxes are not the ONLY consideration for where people choose to live.

    Consider that the 5 richest counties in the US are suburban Washington, DC, in Maryland and Virginia. They can’t leave the public trough.

  11. What proportion of those on 7-figure earnings are in show-biz, banking or software? In which case they’ll be living in LA, NYC or Silicon Valley (all high tax areas). Not many jobs in those sectors in (say) Idaho or Indiana.

  12. …the state and local tax deduction, also known as SALT.

    I had not heard of that until a month or so ago.

    In UK it would be similar to deducting council tax from what one’s HMRC income tax payment.

    It’s an absurd system which encourages state profligacy with no consequence.

    Still absurd: Tax Reform Bill

    Hmm, no

    …People would be allowed to deduct up to $10,000 in property taxes, a demand of Sen. Susan Collins of Maine. That matched a House provision that chamber’s leaders included to keep some GOP votes from high-tax states like New York, New Jersey and California.

    Hmm, no again

    …Deductions for state and local income taxes, moving expenses and other items would vanish, the standard deduction – used by most Americans – would nearly double to $12,000 for individuals and $24,000 for couples, and the per-child tax credit would grow.

    OT – Good:

    …The bill would abolish the ‘Obamacare’ requirement that most people buy health coverage or face tax penalties.

  13. And incidentally, as he finds, when people do move then it’s to the sun, and not for low tax.

    Florida and Texas have no state income tax. Neither does Nevada. Arizona’s income tax burden is lower than average, but not dramatically so. Most other southern “sun” states (except South Carolina, which is flat-out high) have income tax burdens that are either roughly average or somewhat above average. That said, nearly all southern “sun” states have dramatically lower tax burdens when compared to California, New York, New Jersey and other northeastern states

  14. I can’t see why the Republicans didn’t get rid of the State tax deduction years ago.

    There are two types of Republicans: Those who say they want lower taxes and lower spending, and those who really do want lower taxes and lower spending. The former has always vastly outnumbered the latter.

    That’s one of the many reasons Donald Trump is president, and John McCain, Mitt Romney and Jeb Bush are bitter, forgotten losers.

  15. So 2.4% of millionaires switch State every year. The comparison or control should be to non-millionaires with a similar age profile. It should not be a contrast to the lowest income groups who will be overwhelmingly in debt and young who of course are going to try and get out of their parents house and have that fair go that you can in the USandA.

  16. The two related critical considerations are:
    (1) domicile – you can own homes in multiple states, but you can only be domiciled in one. Surprise surprise the high tax states make it difficult to prove that you are no longer domiciled in that state. And if you work in multiple states, they will each fight for their cut.
    (2) Life phase – high earners are typically tied to an employer and that employer is typically tied to a state. Physicians lawyers etc have to live in high tax states during their prime earning years.

    However, once retired or semi-retired, you can take your ball and head to a low or no tax state – which is exactly what most people with means do.

  17. When Kevin Rudd allowed BHP and Rio Tinto to write the Mineral Resources Rent Tax to replace his Resources Super Profit Tax which they had vigorously opposed, they included full deductions of state royalties. Western Australia promptly announced an increase in royalties from 5.25% to 7.5%.

  18. Dennis the Peasant:

    Florida and Texas have no state income tax. Neither does Nevada.

    How does that affect overall income tax burden if high earners can itemize and deduct their state taxes, Dennis? Can you itemize / deduct local property taxes, as well?

  19. Bloke in North Dorset

    So hedge fund managers and other well paid financiers aren’t parasites who don’t contribute to the State. Must have come as a surprise to quite a few New Jersey residents.

  20. @Galt

    That link is brilliant:
    “In a time of rising inequality, I’m not sure the right answer is lowering taxes or making them less progressive,” said Kim S. Rueben, senior fellow of the Urban-Brookings Tax Policy Center at the Urban Institute. “It’s more about keeping an eye on people, seeing where they are and enforcing the tax rules.”

    Yeah- cos if you can’t make them want to stay a campaign of persecution will undoubtedly persuade them they are best off where they are.

  21. Getting to the nitty gritty it seems that the New Jersey billionaire in question (David Tepper) effectively had a time-limited massive gain that needed to be claimed or lost by the end of 2017, so his decision to “move to the sun” (taking his investment firms domicile with him) was timely to say the least.

    Personally, I hope that congress do manage to squeeze the deductibility through as it will make moving to a state without state income tax a no-brainer for millionaires and billionaires as well as giving state legislatures a kick in the teeth.

    Sometimes the only way to get taxes down is for them to go from being a flea bite to a bullet wound.

  22. For dcardno:

    The ‘value’ of the SALT deductions (reduced taxable amount), not credits – (reduce tax dollar for dollar) depends on two factors:

    1. Marginal federal tax rate, e.g if you’re in the 25% federal rate, and have $10,000 in SALT, your federal tax bill is reduced by $2,500. if you itemize.

    2. Itemizing (i.e SALT and other allowed items including mortgage interest) only makes sense if the total itemized amount exceeds the Standard Deduction amount. The current Standard Deduction is ~$13k for a married couple, but I think $24k under the new tax law.

    Filers have to simply compare the two totals (Itemized versus Standard) to see which approach to use (obviously whichever is higher).

  23. ‘“In a time of rising inequality, I’m not sure the right answer is lowering taxes or making them less progressive,” said Kim S. Rueben’

    There’s that damn ‘inequality’ word again. Lock up Ms Rueben.

Leave a Reply

Your email address will not be published. Required fields are marked *