The Myth of Millionaire Tax Flight

How Place Still Matters for the Rich

Cristobal Young

• Publisher: Stanford University Press
• Year: 2017
• ISBN:
  9781503603813
• Edition: 1
• Topic: Sozialwissenschaften
• Subtopic: Soziale Klassen & wirtschaftliche Ungleichheit

In this age of globalization, many countries and U.S. states are worried about the tax flight of the rich. As income inequality grows and U.S. states consider raising taxes on their wealthiest residents, there is a palpable concern that these high rollers will board their private jets and fly away, taking their wealth with them. Many assume that the importance of location to a person's success is at an all-time low. Cristobal Young, however, makes the surprising argument that location is very important to the world's richest people. Frequently, he says, place has a great deal to do with how they make their millions.

In The Myth of Millionaire Tax Flight, Young examines a trove of data on millionaires and billionaires—confidential tax returns, Forbes lists, and census records—and distills down surprising insights. While economic elites have the resources and capacity to flee high-tax places, their actual migration is surprisingly limited. For the rich, ongoing economic potential is tied to the place where they become successful—often where they are powerful insiders—and that success ultimately diminishes both the incentive and desire to migrate.

This important book debunks a powerful idea that has driven fiscal policy for years, and in doing so it clears the way for a new era. Millionaire taxes, Young argues, could give states the funds to pay for infrastructure, education, and other social programs to attract a group of people who are much more mobile—the younger generation.

1

Millionaire Taxes in a World with Few Borders

We live in a time of both globalization and growing inequality. This dual trend presents a troubling challenge. Places and nations can alleviate inequality, at least in part, by taxing the well-off and investing in education, infrastructure, and public services that make life better for most people. But globalization renders the rich more mobile and less connected to places that might tax them. The potential flight of the rich leaves places, states, and countries wondering about the future.

Many places and nations are concerned about the migration of top taxpayers. Taxes paid by the rich provide revenue for vital public services and help to address the growing inequality in market incomes. However, millionaire migration—the flight of the largest taxpayers—can drain state revenues and set off a race to the bottom as states try to woo the richest with ever-lower tax rates.

The discourse of globalization depicts a world where borders are frequently crossed. Rich, cosmopolitan elites and their capital flow easily across borders; people are less tied to place, less tied to the land, to their nation, and to their local communities. If this characterization is true, it is incredibly important. If a jet-setting millionaire class can easily dodge taxes by moving away, these people can effectively dictate tax policy to states and nations by threatening to leave.

In recent years, eight U.S. states have passed “millionaire taxes”—new income tax brackets with higher rates—on their highest income earners. Yet, some other U.S. states, like Texas and Florida, still have no state income tax at all. Can some states tax the rich while other states do not? Can higher tax states retain their wealthy residents and the tax revenue they bring in?

Many answer this question with a ferocious no. As Oregon residents went to the polls to vote on a proposed millionaire tax in 2010, Oregon’s richest resident—Nike founder and chairman Phil Knight—warned that the tax would set off a “death spiral” in which “thousands of our most successful residents will leave the state.”¹ In Maryland, Larry Hogan, a leading critic of the state’s short-lived millionaire tax, insisted in 2012 that “people are simply going to leave, leading to a downward spiral of raising revenues on fewer citizens.”² Hogan was subsequently elected as the Republican governor of Maryland. In New Jersey, Governor Chris Christie simply declared, “Ladies and gentlemen, if you tax them, they will leave.”³

These views are based on the strength of people’s convictions rather than actual evidence. Until very recently, there has been remarkably little data and analysis on the migration patterns of top income earners. Debates have been driven by anecdotes and instincts. This book is about filling in the vacuum of evidence—drawing on big data to provide compelling answers to a systematic set of questions about the mobility of the rich.

Top income earners—defined here as those making at least $1 million a year—are free to live anywhere in the United States. The very richest of them can likely live anywhere in the world. Indeed, for the rich today, the global map looks increasingly like the United States—a collection of places with no real borders between them, among which an economic elite can freely move and choose where to live.

With the diminishing cost of travel, increasing ease of obtaining international visas, and the rise of online communication, the viability of tax migration seems greater today than ever before. Some see the very richest as making up a “transnational capitalist class”⁴ that enjoys unrestricted freedom to move across the world through a network of global cities. Will this compel states and countries to compete over lowering tax rates on the rich? Will low-tax states and nations poach the highest income earners from higher tax places? This issue is closely related to questions of how globalization, more generally, is disciplining nations and creating pressure for an international race to the bottom in taxation and social policy.

Neoclassical economists have long seen taxes as a factor that influences where people choose to live.⁵ Economists, of course, also recognized that taxes pay for public goods—better roads, bridges, parks, and schools—that influence where people want to live. As long as revenues are used to fund public services that matter to residents, there is no reason to think taxes would lead to out-migration. However, in more recent years, some have argued that under highly progressive taxes, the rich contribute much more than they receive in public services. Harvard economist Martin Feldstein has made some of the strongest claims about tax migration among top earners. In a world of free mobility, Feldstein argues, taxes on the rich do not raise revenue or reduce inequality but simply lead to millionaire migration. If states raise taxes on the rich, the top income earners will leave, causing not just a loss of tax revenue but also a shortage of high-skill workers. The market will, in turn, bid up the wages of the remaining high-skill workers, and inequality in the state will return to its equilibrium level. Taxes on the rich, Feldstein argues, fail because of freedom of movement.⁶ This view has become increasingly prominent in public debates over taxes, especially at the state level.

There are, however, broader sociological reasons to doubt the ready mobility of millionaires. Moving is a young person’s game, but earning income in the top bracket is not. Migration overwhelmingly occurs when people are establishing their careers. People almost never move when they are at the advanced career stage—a time when they are most likely to face a millionaire tax. At the peaks of their careers, people have family responsibilities—spouses and children who may be opposed to moving. They also have a lot of business and social contacts that make them prominent, well-connected insiders where they live. Top income earners, in other words, have often accumulated significant human, social, and cultural capital where they live.

Economic sociologists have long emphasized that economic action, such as income earning, is “embedded in concrete, ongoing systems of social relations.”⁷ Income is partly based on personal connections to colleagues and clients, experience within a company, local reputation and goodwill, knowledge of one’s competitors, and access to social networks that bring rich information. Moving after achieving high success or at a late career stage can mean giving up a home-field advantage that may not make much business or economic sense.

. . .

In the age of globalization, what is the connection between the rich and the places where they live? Is place a temporary convenience for the rich and powerful—readily switched out when the tides change? Or is place a deep foundation for their success? Are top income earners “mobile millionaires” searching for low-tax places to live, or are they “embedded elites” reluctant to move away from the places where they have become highly successful?

These questions are important because they can yield insight into the future of inequality in the United States. One of the biggest socioeconomic questions of our time is whether the United States can build a new era of shared prosperity. Can we make the engine of economic growth something that benefits everyone?

In recent decades, market economies have created a great deal of inequality. This is a story of middle-class wage stagnation, combined with dramatic gains in income at the top. The top 1 percent today capture more than 20 percent of all income created in the U.S. economy. This share has been growing rapidly. Since the early 1990s, roughly half of all income growth in the United States has accrued to the top 1 percent, with the other half going to the rest of the population—the 99 percent.⁸ Corporate CEO salaries illustrate the extremes of the growing divergence in economic fortunes. Since 1978, real CEO salaries have increased roughly tenfold—from $1.5 million to $16 million per year—while average worker incomes have risen little more than 10 percent.⁹ This is the rise of a winner-take-all economy, where the benefits of economic growth largely accrue to those at the top.

Rising inequality is not a generic feature of capitalism. In the years following World War II and into the late 1970s, tremendous economic growth was coupled with a declining share of income held by the top 1 percent. This was truly an era in which “a rising tide lifts all boats”—and middle-class boats were rising fastest. But the world—and the nature of economic life—has changed a great deal in the decades that followed. Those changes include the end of the Cold War, the computer revolution, globalization, trade deals, offshoring of jobs, the decline of private sector unions, the growth of Wall Street and financialization of the economy, eroding minimum wages, and the reduction of taxes on top incomes. The end result is that Americans are no longer living in an era of broadly shared prosperity.

It is easy to be pessimistic about our economic future. Thomas Piketty, in his book Capital in the Twenty-First Century, argues that the post-war era of economic growth and shared prosperity was an anomaly and that the future will entail a steadily rising concentration of wealth and power in society.¹⁰ The rate of return on capital in the foreseeable future, Piketty argues, will be higher than the overall rate of economic growth. This means the rich—or, at least the owners of capital and their investment managers and advisors—will be getting richer at a faster rate than the rest of society and will be claiming a growing share of the overall dividends of a productive society.

Piketty calls for a global tax on wealth—although he himself presents it as a hypothetical ideal. We could think of the proposal as calling for a “World Tax Organization,” operating alongside the World Trade Organization.¹¹ But there is no obvious pathway to such an international consensus. One problem is that the countries of the world—and even states within the United States—do not agree on what the top tax rate should be, and many places want different tax policies. In a time of globalization—and in a world with digital finance, shell companies, and easy mobility—tax flight and the migration of the elite are prominent concerns for policymakers. If some places have very low taxes, can other places sustain different policies that ask more of the top income earners?

Varieties of Taxation

Over the last several decades, U.S. national tax policy has shifted away from the taxation of the rich, sharply reducing tax rates on top incomes, capital gains, and multimillion-dollar inheritances. The U.S. anti-tax political movement has largely been a campaign to “untax the one percent.”¹² Since 1970, total federal taxes on the general population are basically unchanged at about 23 percent of total income. But for the richest, federal taxes have fallen by half, from 70 percent to 35 percent.¹³ This has been referred to as “trickle down” economics—the belief that if the rich are taxed less, the economy will grow and generate jobs and economic gains for everyone. But the economy has not grown well.

The combination of declining federal taxes on the rich and rising incomes at the top has tempted a number of U.S. states to adopt so-called millionaire taxes on top incomes. States have been, in essence, going where the money is to find new revenues at the top of the income distribution. Since the early 2000s, states including New Jersey, California, Maryland, New York, Wisconsin, Oregon, and Connecticut have adopted additional tax brackets for the very highest income earners. Several other states, including Washington and Illinois, have tried to pass such taxes and failed. A central question, in all of these political campaigns, has been whether these blue state policies show leadership in addressing inequality—by drafting a new social contract with the rich—or whether the rich will simply migrate to red states that offer lower tax rates.

There are growing signs that the elites themselves are troubled by rising inequality and may be more tolerant of higher taxes than the current political discourse suggests. Some of the richest people in America—Bill Gates and Warren Buffett—have led a campaign for the Giving Pledge, calling on fellow billionaires to give away at least half their wealth to charitable causes. Many have signed on. As Buffett has said, “If you’re in the luckiest 1 percent of humanity, you owe it to the rest of humanity to think about the other 99 percent.”¹⁴ Buffett also offered a longer justification for the Giving Pledge, rooted in the idiosyncrasy of market income:

I’ve worked in an economy that rewards someone who saves the lives of others on a battlefield with a medal, rewards a great teacher with thank-you notes from parents, but rewards those who can detect the mispricing of securities with sums reaching into the billions.¹⁵

This comes from the spirit of noblesse oblige—a feeling among those at the top that they have not only amassed a great fortune but have also been very fortunate.

What about the less elite millionaires like top doctors, lawyers, and business managers? Do they feel a similar sense of obligation that comes with their more modest fortunes? Concern about inequality often comes from a more personal place for higher-end income earners: parental responsibility and concern about how their children will fare in a winner-take-all society. Sociologist Marianne Cooper spent years interviewing rich and poor families in Silicon Valley.¹⁶ Poor families, she found, rarely talked to her about the macro-economy or trends in inequality; they were focused on making ends meet week to week. But high-income families were keenly aware of growing economic polarization. This drove an intense concern about their children, a fear that as parents they were not doing enough to prepare them for an increasingly unequal world and a worry that they had not yet saved enough to pay for their kids’ master’s degrees. High-income families saw a world split between the haves and the have-nots as an existential concern for their children, and this framed much of their own self-doubts as parents. This is an intergenerational Rawlsian “veil of ignorance”: The successful worry about inequality because they do not know where their children will end up in the economic world of tomorrow.

Is this enough for top income earners to see progressive taxation as legitimate? In some ways, inequality may push people at the top to even more preciously guard their income. The top 1 percent may well alternate between feeling some noblesse oblige on one hand, yet also feeling some resentment that taxes are getting in the way of their responsibility to their children. While people at the top may genuinely wish the country was less economically polarized, they also know there is an arms race at play.

So, politically, there is room for appeals to the nobler instincts of top income earners. Following Warren Buffett’s lead, the Patriotic Millionaires activist group has been cajoling their fellow rich to accept greater tax responsibility. The Patriotic Millionaires say they reject the idea that

only a very small group of highly talented elites is responsible for creating the wealth. . . . We [millionaires] have been the biggest beneficiaries of this system called America, and we should pay more to keep it running. We have reaped the greatest share of the benefits. We should contribute the largest portion of the investment.¹⁷

In 2011, a survey of millionaire investors by the investment group Spectrem found that a sizable majority (...