Saturday, February 16, 2013

Tax flight myth

The concept that tax increases on the rich causes their migration is making news again because of the French actor moving to Russia and the American golfer suggesting he will move from California because of taxes.  Thus, the tax conservatives who advocate for lower taxes on the rich argue that increasing taxes on the rich will cause a loss of revenue to the country and to the state.

"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. At least three recent academic studies have demonstrated that the number of people who move for tax reasons is negligible, even among the wealthy." [High Taxes Are Not a Prime Reason for Relocation, Studies Say].

One of the studies, Tax Flight Is a Myth — Center on Budget and Policy Priorities:  "The effects of tax increases on migration are, at most, small — so small that states that raise income taxes on the most affluent households can be assured of a substantial net gain in revenue."

The study critically evaluates an ECONorthwest analysis of an Oregon 2009 legislative proposal to increase marginal tax rate that warned: “The data are clear. If the state raises the tax rate on affluent households, substantial numbers will move income out of Oregon.” However, the Tax Flight Is a Myth study states that ECONorthwest study doesn't stand up under scrutiny:
"In short, the ECONorthwest study wrongly blames taxes for a set of changes in residency and migration patterns that actually reflect other economic and demographic factors, such as retirements, housing price differentials, and differences in business cycles."
In Appendix II, the Tax Flight Is a Myth study elaborates on the three reasons ECONorthwest analysis is flawed. I am not going to regurgitate the three reasons, but I can't help but call attention to this passage depicting the partial influence on migration out of Portland Metro to Washington:
"The City of Portland was perceived by some of its residents as very “liberal” politically, aggressive in enforcing stringent environmental regulations that affected residents and businesses alike, and tolerant of people with perceived “alternative lifestyles.” Many of these residents cringed at the phrase found on many bumper stickers, tee shirts, and signs in Portland saying “Keep Portland Weird!”  Schools and public safety were perceived to have deteriorated in the city. By contrast, Clark County was perceived as “family friendly.” Schools were viewed as newer and better funded than in Multnomah County, and streets safer. Clark County had more open space. Houses had larger yards in which kids could play. There was less exposure to people who engaged in lifestyles perceived by some to be undesirable."
The bottom line for Oregon: "While tax increases might cause some affluent Oregonians to cross the state line, this effect will not significantly shrink Oregon’s overall income tax base. The affluent Oregonians who stay put will pay higher taxes that will dwarf any revenue lost if a few leave."

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