Do millionaires move to avoid high taxes?

November 28, 2012

In 2009, faced with a heavy debt burden and plummeting tax revenue, then-British Prime Minister Gordon Brown introduced a new 50 percent tax bracket on income over £1 million (about $1.6 million). Did it work?

The numbers are in, and the Conservative government that ousted Brown is claiming the policy backfired. In 2009-2010, before the policy took effect, 16,000 tax filers reported having an income above £1 million. In 2010-2011, after it took effect, that number dropped to 6,000. Harriet Baldwin, a Conservative MP, seized upon the figures, declaring, “Labour now needs to admit that their policies resulted in millionaires paying less tax and come clean about whether they would reintroduce this failed policy if they were in power.”

It's an old criticism of high tax rates, especially in Britain, where high rates in the 1970s caused musicians like the Rolling Stones, David Bowie, and Pink Floyd to flee the country temporarily. But is it actually true? Do high rates actually cause a substantial flight of millionaires?

First off, it's important to note that the number of high-income filers varies a lot. Some people make a lot of money one year and not much the next, and millionaires tend to move between countries more often than other groups. Here's how many Brits reported income over £1 billion in the decade preceding the rate bump (data from Her Majesty's Revenue & Customs here):

Some of the rise in filers is to be expected, due to normal, inflation-related increases in wages pushing them above the £1 million mark. But what this suggests is not just that the number of high-income filers jumps around a lot — nearly halving between 1999 and 2000, for instance, then seeing big jumps from 2004 to 2007 — but that this seems to be related to the finance boom of the mid to late 2000s. So it's hard to attribute the lower number of millionaires paying taxes in 2010 to the higher rates alone.

To see if high taxes are actually causing, rather than coinciding with, lower millionaire filings, you need to do some econometrics. Those who have reach much more equivocal conclusions than Baldwin. The best recent studies on the question have concerned millionaire taxes imposed by states in the United States. In those cases, it's more likely you'd see millionaires fleeing. You'd expect more people to, say, leave New Jersey for Connecticut when the former imposed a millionaire's tax than to move from Britain to the United States when the former raises rates. People are generally more willing to move within their country of residence than between countries.

But even in those cases, researchers haven't found much evidence that millionaires flee in the face of high taxes. Roger Cohen, Andrew Lai, and Charles Steindel at the New Jersey Department of the Treasury and Cristobal Young and Charles Varner of Stanford released studies in 2011 and 2012, respectively, evaluating the effects of New Jersey's millionaire tax, which governor Jim McGreevey signed into law in 2004.<

Cohen, Lai and Steindel found that the rate increase caused 25,000 residents to leave the state by 2011, and cost the state about $150 million in tax revenue. But that is dwarfed by the $1 billion the rate increase brought in. The overall revenue effect of the tax, then, is still positive. Young and Varner found still smaller effects, estimating that 69.7 millionaires left — not 69,700, but a little short of 70 people. This cost the state $16.4 million, the vast majority of which was due to the flight of the top 0.1 percent, or those making over $3 million a year.

Varner and Young have also studied taxes on millionaires imposed in California, and reached similar conclusions. A 2005 high-income tax hike to pay for mental health services was actually associated with a decline in out-migration of millionaires, and cuts to high income taxes in 1996 had no effect on the number of millionaires in the state. By far the most important determinant of whether millionaires move, Varner and Young found, was whether they get divorced or not.

These three studies are in line with the previous literature on millionaire flight, which has found either no effects or very small ones. And if there are no effects within the United States, it's extremely doubtful there would be any between countries.

What's more, it's not clear that any effects the British law had would be relevant for the U.S. tax discussion. Even if the top income tax rate went back up to 39.6 percent, that would still be lower than that of most European countries, which would leave potential tax exiles fewer places to flee. Countries with unusually high rates, by contrast, have more to worry about.

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Brad Plumer | November 28, 2012