Robert Frank of the Wall Street Journal summarizes a new study on the impact of a “millionaire’s tax” in New Jersey:
The study, by sociologists Cristobal Young at Stanford and Charles Varner at Princeton, studied the migration patterns of New Jersey’s millionaires before and after 2004, when the state imposed a “millionaire’s tax” that raised rates on those earning $500,000 or more to 8.97% from 6.37%.
The study found that the overall population of millionaires increased during the tax period. Some millionaires moved out, of course. But they were more than offset by the creation of new millionaires.
Aha! The population of millionaires increased! So surely the tax made no difference at all! Well, no. Young and Varner would never make such a claim, because it’s not true. What is true is that a decent-sized increase in the top marginal tax rate didn’t suddenly drive New Jersey’s rich out of the state. The real question is whether the difference it did make is worth losing any sleep over. Young and Varner suggest that the answer is no.
One small red flag in the paper is that the authors don’t draw on the latest research on long-run behavioral responses to taxation, a subject to which we’ll return. For now, let’s return to Robert Frank’s post:
The study dug deeper to figure out whether the millionaires who were moving out did so because of the tax. As a control group, they used New Jersey residents who earned $200,000 to $500,000–in other words, high-earners who weren’t subject to the tax. They found that the rate of out-migration among millionaires was in line with and rate of out-migration of submillionaires. The tax rate, they concluded, had no measurable impact.
“This suggests that the policy effect is close to zero,” the study says.
Of course, not all millionaires are the same, and some are more likely to leave than others. The study found that New Jersey millionaires over the age of 65 and who live off their investments are the most likely to leave. Among those who earned their money from investments, the tax raised migration rates by 27 people per thousand among the top 0.1% of earners.
Yet those who own their own businesses or earn their money in New York–groups that account for a large share of millionaires in New Jersey–are less likely to leave. [Emphasis added.]
The category of business-owners is an interesting one. If I inherited a family-owned and family-operated funeral home in an affluent section of New Jersey, I imagine I’d be very immobile indeed. The founders of high-growth young firms might behave differently.
The study also found that New Jersey millionaire-earners are an ever-changing group, with people constantly moving on and off the top rung of the income ladder. Since there is no permanent top-earning class, the occasional top earners have less incentive to leave because of the tax.
“In summary, the new tax did not appreciably increase out-migration,” the study concluded.
This is a point that many of us who are critical of high MTRs have made in the past, and it’s an important point to keep in mind. There is a high degree of volatility at the top.
The study contained a number of passages that I found instructive:
The consensus emerging from the migration literature — and from a range of research designs — is that people do not generally migrate in response to tax increases (or to tax differentials that would be “easy” to arbitrage). The reasons for this are no doubt plentiful: (1) people do not like commuting (Kahneman et al., 2004); (2) they do not want to give up their jobs (Winkelmann and Winkelmann, 1998); (3) they do not want to separate from their family, friends, and neighborhoods (Dahl and Sorenson, 2010); and thus they have a general aversion to migration. For homeowners, brokerage fees associated with selling their existing home and buying a new one consume a large portion of annual income (in the range of 25 percent) (Wildasin, 1993). Moreover, because taxes tend to ﬁnance public goods that people value, resistance to migration may allow people time to acclimatize to a higher-tax, higher-public services environment (i.e., give people time to observe the impact of their tax dollars). [Emphasis added]
This last point is particularly salient, I imagine, for affluent households with children living in towns with high housing values and high levels of education expenditures.
What I want to know is: what happens when we look at taxpayers who work and pay taxes in-state? Many of the most affluent New Jersey taxpayers work in New York city, which has a pretty significant impact on their tax status. I’ll address this subject in my next post. (I’m told that my posts can be too long.)