Do tax hikes send the rich packing?

will taxing the rich cause mass migrationIn addition to communities I have a strong interest in how complex systems operate, so from this I’m generally pretty interested in politics and how societies evolve (sorry politicians – I don’t think they’re designed any more than our ecosystem is).  So as it’s Sunday, this post will have a political leaning.

With most western economies on the scrap heap, the issue of tax is seldom far from the thoughts of politicians.  A particular topic in most western countries has been whether to increase taxes on the very rich, so that they pay a greater share of the rebuilding of public finances than the rest of us.

I won’t get bogged down on whether that is the right or wrong thing to do, but instead want to look at the usual refrain that rising taxes on the rich will cause many of them to move to a lower taxed country.  We’ve seen countless examples of multinationals for instance banking their overseas profits in countries with particularly low tax rates, and the argument goes that in our mobile and global society, labour will go to where it is rewarded most.

This concept was tested by a piece of research conducted by Stanford and Princeton universities.  The research revolved around a new proposition in California to make the tax system there more ‘progressive’, or in other words to make the wealthy pay more.

The research team trawled through data from the California Franchise Tax Board during a period from 1992 to 2009 to get a decent picture of the precise movement of millionaires into and out of the state.  Interestingly, they found no correlation between tax increases (or tax cuts) and migratory patterns of millionaires.

So if income tax levels don’t cause the rich to move about, what does?  As one can understand, there is much more to living in a particular place than merely the tax regime on offer.  You make personal and professional contacts, your children have schools that they like, and of course the rise of clusters makes the network effect more pronounced.  People crowd together, from Silicon Valley to New York City, because of the returns associated with collaboration

Of course that isn’t to say that should the pip be squeezed sufficiently that it won’t tip people into leaving.  France for instance may be a case in point here, but the lesson from the research seems to be that if things like clusters are sufficiently strong in an area, then it would take an awful lot to make people leave.


3 thoughts on “Do tax hikes send the rich packing?

  1. Nice post. I agree, many people respond with theories that have no fact to support them. They are hypothetical and ideological.

  2. People vote with their feet – there are more people moving out of California than moving in ..Higher taxes will force more out, along with their jobs and their taxpayer can guess the result for California economy

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