U.S. Data Mostly Disproves Notion of Capital Flight Following Higher Taxes on the Rich

Some of the strongest arguments for higher taxes on the richest people in the country are how there’s been an enormous upward redistribution of income over the last four decades, how there’s a strong majority of public support for higher taxes, and how there’s an immoral economic landscape for the lower classes that contains — among other defects — a child poverty rate over 20 percent. The situation of inequality has become absurd enough that there are even groups such as Patriotic Millionaires that are supporting higher taxes on rich people.

In the classic Ayn Rand novel Atlas Shrugged, the rich go “on strike” – withdrawing their services and disappearing from society in protest against taxes and regulation. Weary of carrying an ungrateful world on their shoulders, business leaders and other top income earners finally shrug, and leave the world without them.

The book’s metaphor inspires political rhetoric to this day: if you tax the rich, they will leave. Variations on the threat are issued by well-off individuals all over the world – not least in the United States, where each state sets its own tax policies, and periodic warnings are issued that taxes on the rich will lead to millionaire migration to more obliging US states.

When Oregon voters passed a millionaire tax at the start of this decade, for example, the state’s richest resident, Nike CEO Phil Knight, warned the tax would set off a “death spiral … in which thousands of our most successful residents will leave”. As California considered similar taxes, policymakers cautioned “nothing is more mobile than a millionaire and his money”. In New Jersey, governor Chris Christie simply stated: “Ladies and Gentlemen, if you tax them, they will leave.”

But does this rhetoric stand up to statistical scrutiny? 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%.

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The Forbes list of the world’s billionaires offers an international look at elite migration, and takes us higher up the food chain to the greatest corners of wealth.

Analysis of this list shows most of the world’s billionaires – about 84% – still live in their country of birth. And among those who do live abroad, most moved to their current country of residence long before they became wealthy – either as children with their parents, or as students going abroad to study (and then staying).

Only about 5% of world billionaires moved abroad after they became successful. These individuals readily fit the stereotype of a “transnational capitalist class” – unplugged from their nation state, travelling the world for some combination of tax avoidance and cosmopolitan lifestyle.

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Millionaire tax revenues could be used to invest in things that matter to young people starting out: education, infrastructure, public services, urban amenities, quality of life. And this would help to attract and retain a pipeline of future top-earners, creating a virtuous tax circle.