One of my pet peeves is local governments who give huge tax breaks to corporations to entice them to locate a factory or office locally. The excuse is always given that it creates jobs, but that is often a cruel joke. First of all, it doesn’t create any jobs, it just moves them from one place to another. Even worse, giving tax breaks to Wal-mart may create Wal-mart jobs, but it destroys other jobs from the small businesses who close because somehow they can’t compete with a huge multinational corporation that is also getting massive tax breaks. In the end, the local government kills their own revenue sources and the local community suffers.
So I am distressed that the same flawed logic is being applied not just to big corporations, but to rich people themselves. For example, New Jersey governor Chris Christie recently vetoed a state tax on the wealthy, saying:
You’re not going to fix this tax situation by continuing to load more and more taxes onto people who have both the ability to leave the state and the inclination to leave the state if they feel as if they are being treated unfairly.
And governors in New York and Maryland also have killed extra taxes on the wealthy, citing similar concerns that if you tax rich people, they will move to somewhere else where the taxes are lower.
Two new studies show that there is little or no evidence that rich people leave high-tax states. One study tracked 18 years of migration in New England states and found that (not surprisingly) tax levels factored very little if at all into rich people’s choice of where to live. According to the study:
There are many reasons households do not flee from a state when taxes are increased, including the fact that they value the public services financed by taxes, the cost of relocating to a different state (both financially and psychologically) is quite high, and the potential gains from moving are often small. The main reasons for moving to a different state are employment, family-related matters, and education. Taxes account for little of the migration from New England.
The second study was actually done in Christie’s state of New Jersey. In 1994, New Jersey increased taxes on income over $500,000 by 2.6% (which gave them one of the highest tax rates on the wealthy in the country). The study compared people who made just under $500,000 (and so were not affected by the new tax) with people who made more and so were affected by the tax. The result? Both groups moved away from New Jersey at the same rates, so there was no evidence that higher taxes caused anyone to move.
So where did this dumb idea come from? Why are we using a false excuse to cut taxes on the rich?
Well, one explanation is based on Arthur Laffer, the economist who came up with the infamous Laffer curve that was used to try to prove that if you raise taxes, then people work less, which in turn will lower tax revenue. Conversely, the theory went, if you lower taxes (as we have done, repeatedly) people will work more, and — as Reagan claimed — tax revenue will actually go up. Well, unsurprisingly it never quite worked out that way. Laffer also claimed that he left California and moved to Tennessee because they had no income tax, so maybe that anecdotal evidence is where this dumb idea came from.