Norway’s Class-Warfare Tax Policy is Backfiring

Class-warfare tax policy is bad news.

Last year, I warned that, “rich people are not sheep, patiently waiting to be sheared. If their fiscal torture is too extreme, they will leave.”

Norway is a powerful example. Here’s a chart showing the rate at which Norwegians are moving to Switzerland.

You may be wondering what caused the sudden change after 2022.

The above chart comes from a Bloomberg report by Ott Ummelas, and he explains what happened after Norway “increased the wealth tax burden by 55%.”

Steep increases in wealth and dividend taxes by Norway’s left-leaning government have prompted dozens of the Nordic nation’s rich to move to another prosperous, mountainous country to the south. …the small but significant migration by wealthy entrepreneurs could become permanent, bolstering Switzerland’s status as a low-tax haven. …Eighty-two rich Norwegians with a combined net wealth of about 46 billion kroner ($4.3 billion) left the country in 2022-2023, with 34 moving out last year alone, according to data from the Finance Ministry. More than 70 of those have moved to Switzerland… Swiss taxation varies by canton, but the overall effect is a significantly lower percentage of wealth and income than most other European nations. …Hollup said…”it’s a two-fold issue of losing tax revenue for Norway and the risk that a lot of brain capital has left the country.”

I started today’s column by observing that rich people are not sheep.

Instead, they are geese. Or, to be more specific, they are golden geese that have flown away.

P.S. This is primarily a column about misguided wealth taxation by Norway. But tax competition produces winners and losers, so this is also a story about the economic success of Switzerland.

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The Laffer Curve’s Latest Victim: California

The Laffer Curve is the common-sense notion that people respond to incentives.

And even Paul Krugman admits this has implications for tax revenue.

For instance, if tax rates increase, people may decide to earn and/or report less taxable income. When that happens, revenue won’t increase by as much as politicians hope.

And the reverse is true (in some cases, dramatically true) if tax rates decrease.

For today’s column, let’s look at a real-world example of the Laffer Curve.

Joshua Rauh of Stanford and Ryan Shyu of Amazon have new research that looks at what happened after California voters approved a big class-warfare tax increase in 2012.

Here are some excerpts from their study.

In this paper we study the question of the elasticity of the tax base with respect to taxation…on the universe of California taxpayers around the implementation of major 2012 ballot initiative, Proposition 30. …The Proposition 30 ballot initiative increased marginal income tax rates…by 3 percentage points for singles with over $500,000 in taxable income (married couples with over $1 million)…, the highest state-level marginal tax rate in the nation. …We…document a substantial onetime outflow of high-earning taxpayers from California in response to Proposition 30. …For those earning over $5 million, the rate of departures spiked from 1.5% after the 2011 tax year to 2.125% after the 2012 tax year, with a similar effect among taxpayers earning $2-5 million in 2012. …California top-earners on average report $522,000 less in taxable income in 2012, $357,000 less in 2013, and $599,000 less in 2014; this is relative to a baseline mean income of $4.15 million amongst our defined group of California top-earners in 2011. Compared to counterfactuals in similarly high-tax states, California top-earners on average report $352,000 less in taxable income in 2012, $373,000 less in 2013, and $481,000 less in 2014.

So some upper-income taxpayers moved and others (unsurprisingly) earned/reported less taxable income.

Did that have an impact on tax revenue?

The answer is yes.

…we assess the implications of our estimates for tax revenue in the context of California Proposition 30. A back of the envelope calculation based on our econometric estimates finds that the intensive and extensive margin responses to taxation combined to undo 45.2% of the revenue gains from taxation that otherwise would have accrued to California in the absence of behavioral responses within the first year and 60.9% within the first two years.

Wow, more than 60 percent of projected revenue evaporated within two years.

By the way, these estimates are based on data only through the middle of last decade. And something significant happened after that: The state and local tax deduction was curtailed as part of the Trump tax package.

The authors speculate that this will have very important implications.

…the “Tax Cuts and Jobs Act” (TCJA). Under this law, the top rate is 37% for single and head-of-household filers earning over $500,000, and for married filers earning over $600,000. Despite this nominal cut to top rates, the legislation on net increased rates on top earners because it capped state and local deductions at $10,000 total. … we use our top line intensive margin elasticity estimate to provide a ballpark quantification of the federal tax revenue implications of TCJA for the particular set of California high earners in our treatment group. …Consider a married California taxpayer earning $4.15 million of wage income. In 2017, this taxpayer pays a federal tax bill of $1,431,305. In 2018, incorporating the 8.6% income decrease, this taxpayer pays a federal tax bill of $1,333,946. This amounts to a 6.8% decrease in tax revenue, putting the TCJA on the wrong side of the Laffer Curve for high-earning individuals in California. … the TCJA increased incentives (in terms of the level of the average tax rate gap) to leave California for zero-tax states by 2.15 times the amount of Proposition 30 for those earning over $5 million, and by a factor of 2.43 for those earning from $2-5 million. Based on these scaling factors, we would predict an out-migration effect of 1.46% of those earning $2-5 million, and 1.51% of those earning $5 million.

None of this should be a surprise.

Indeed, I wrote back in 2012 that bad things would happen when Proposition 30 was approved.

I feel safe in stating that this measure is going to accelerate California’s economic decline. Some successful taxpayers are going to tunnel under the proverbial Berlin Wall and escape to states with better (or less worse) fiscal policy. …It goes without saying, of course, that California’s politicians…will act surprised when revenues fall short of projections because of the Laffer Curve.

To be fair, I don’t know if California politicians are genuinely surprised. I suspect many of them privately understand the adverse consequences of class-warfare tax policy. But they nonetheless support bad policy because they are motivated by a selfish desire to maximize votes.

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Blue-to-Red Tax Migration, Part V

Time for the final segment of my five-part series for 2023 on blue-to-red tax migration (previous versions here, here, here, and here).

We’ll start with this table showing what has happened in America’s 10-largest states.

You should notice a pattern.

The table comes from a column for National Review written by Dan McLaughlin. He explains what these numbers mean.

The Census Bureau has announced its year-end estimates of state population changes… They once again show the continuing trend of America’s population shifting out of its bluest states and into red states… The biggest boom states in the past year? In terms of raw numbers, Texas and Florida dwarf everyone else, followed by North Carolina and Georgia… In percentage terms, South Carolina was the biggest winner… Eight states lost population. New York was by far the biggest loser, dropping over 100,000 people, 0.5 percent of its population in a single year. Five of the eight states have been governed by Democratic trifectas for this entire decade.

The Wall Street Journal editorialized a few days ago about this internal migration. Here are some excerpts.

The U.S. population increased by 1.6 million between July 2022 and July 2023, with states in the South accounting for about 1.4 million of the growth. Leading the boom were Texas (473,453), Florida (365,205)… Eight states saw population declines, with the biggest in New York (-101,984), California (-75,423) and Illinois (-32,826). …what these states have in common: High taxes, burdensome business regulation and inflated energy and housing prices. ….An interesting natural experiment has been Washington state, which gained tens of thousands of people from other states on net each year in the last decade. But since enacting a 7% capital-gains tax on higher earners in 2021, Washington has been losing residents to other states at an accelerating pace—15,276 this past year. …A big problem for Democratic-run states is that their affluent residents are leading the exodus, and they pay the majority of income tax that supports their expansive welfare programs.

By the way, the WSJ‘s editorial explains that there are political implication of America’s internal migration.

State migration has long-tail political consequences. California, New York, Illinois, Minnesota and Rhode Island and Oregon on present trend would lose a combined 12 House seats in the 2030 reapportionment, which is as many as Florida, Georgia, Texas, Tennessee, North Carolina, Utah and Idaho would collectively gain.

And the National Review column includes a map for those of us who like visuals.

I’ll close by noting that blue states aren’t just losing political power. They’re also losing lots of taxable income.

P.S. I think taxes are a major factor in driving internal migration, but there are other factors as well (see here, here, here, here, and here).

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Blue-to-Red Tax Migration, Part IV

State-to-state migration is an underappreciated issue, for both economic and political reasons. And I’ve explained that taxes play a huge role.

• In Part I of this series, we looked at how people – and taxable income – are moving from high-tax states to low-tax states.
• In Part II of this series, we reviewed how tax-motivated migration will create further fiscal nightmares for high-tax states.
• In Part III of this series, I shared excerpts from a column I wrote for Bloomberg about why state tax competition is desirable.

For Part IV of this series, let start with this map from Axios showing the 10 biggest state-to-state moves in 2022.

The obvious takeaway is that people are escaping the fiscal hellholes of California and New York.

The second takeaway is that tax migrants are mostly picking states with no income tax. And when they don’t move to states with no income tax, they move to states with flat taxes.

But there is a very interesting story to tell about the state of Washington. Yes, it’s getting plenty of tax refugees from California, but it’s also losing one very prominent taxpayer.

Because although Washington has no income tax, politicians are trying to impose one. And they already have saddled their taxpayers with a capital gains tax and a death tax.

Jeff Jacoby of the Boston Globe explains that those taxes won’t collect any money from Jeff Bezos.

Jeff Bezos, the founder of Amazon and the third-richest person in the world, has lived in Washington state for nearly 30 years. …he has decided to relocate to Miami. …Bezos is almost certainly going to save money — a lot of money — once he is no longer subject to Washington’s tax laws. To begin with, Washington has a new capital gains tax, which was upheld by the state’s highest court in March. …By relocating to Florida, he ensures that future stock sales will likewise remain untouched by Washington’s new capital gains levy. That’s not all. Washington had no estate tax during the years when Bezos was building Amazon into a commercial giant, but that changed after 2005. Now Washington has the steepest death tax in the nation, with a top rate of 20 percent on estates worth more than $9 million. Florida, on the other hand, has no estate tax at all. For a man with a personal fortune of more than $160 billion, the move from Washington to Florida could be worth $30 billion or more to his heirs.

What’s the logical conclusion?

Jacoby provides the answer, telling politicians that Bezos and other rich people can vote with their feet.

He has also provided fresh evidence of an economic fact of life: When taxes get too high in one state, the wealthy can move to another one. …In progressive circles, it remains an article of faith that high tax rates don’t drive people to flee, but evidence to the contrary is overwhelming. Massachusetts, Washington, California, and Illinois can keep waving goodbye as prosperous taxpayers keep relocating to Florida, Texas, Arizona, and New Hampshire. Or they can pull their heads out of the sand and acknowledge that reality isn’t optional. In the real world, when you try to soak the rich, you’re apt to lose the rich.

Amen. The geese with the golden eggs can and will fly away. One of the reasons that tax competition should be celebrated.

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A Growth Agenda for the Developing World

Back in early 2009, the Center for Freedom and Prosperity released this video to explain the universal recipe for growth and prosperity.

The core message, if you want to skip the six-minute video, is that nations will become richer if they have a good mix of these five ingredients.

• Modest fiscal burden
• Minimal red tape
• Stable money
• Open trade
• Rule of law

I’m recycling the video today because it is a perfect introduction to a superb column in the Wall Street Journal by Mary Anastasia O’Grady.

She explains that there’s little hope of solving the border crisis if foreign governments continue to impose bad policies that impoverish their citizens.

The right thing to do about the migration crisis is to return to a U.S.-led pro-growth agenda for the Western Hemisphere. …Open markets, sound money, light tax and regulatory policies and the rule of law were once standard U.S. advice for the neighbors. Today both Democrats and Republicans are protectionist. That’s bad enough. But the priorities of America’s far left have become top foreign-policy priorities for the Biden State Department and White House: LGBT initiatives, income equality, labor activism and the end of fossil fuels. Profit is a dirty word. …bidenista hostility toward capitalism everywhere. …it will be tough to hold back the human tsunami crashing on U.S. shores. Economic freedom and development are the only humane solutions to the poverty driving these huddled masses. …The Washington Consensus was…a blueprint for fiscal discipline, privatization, tax reform, deregulation and trade and investment liberalization. …its remedies bore fruit. …neither protectionism nor the antidevelopment ideology of socialism is cost-free. The hardship hitting all sides in the migrant crisis is the high price of getting the economics of development wrong.

The moral of the story is that the developing world needs free markets and limited government. That will mitigate the flow of illegals since there’s not a lot of emigration from nations that become prosperous.

Sadly, the usual knee-jerk response from Washington is foreign aid. But that approach is either wasteful or counterproductive.

P.S. Regular readers won’t be surprised to learn that the OECD and IMF are trying to further impoverish Latin American countries.

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China and Migration

I am not bullish about China’s economy. Even 10 or more years ago, when many people thought China was going to be the economic superpower of the 21st century, I poured cold water on those predictions.

Simply stated, China suffers from too much bad economic policy.

Is it as bad as it was during Mao’s years, when the country was impoverished by pervasive North Korean-level statism and millions starved to death?

Of course not. The pro-market reforms of the 1980s and 1990s yielded positive results.

But those reforms were akin to a 400-pound man dropping down to 350. A step in the right direction, to be sure, but hardly a model of good health.

So it should not be surprising to see that China’s per-capita economic output is still far below American levels.

Unfortunately, it seems like Chinese policy is now getting worse, with politicians making government an even bigger burden.

And this is leading some people to “vote with their feet.” Here are some excerpts from a story in the New York Times by Li Yuan.

They went to the best universities in China and in the West. They lived middle-class lives in Beijing, Shanghai and Shenzhen and worked for technology companies at the center of China’s tech rivalry with the United States. Now they are living and working in North America, Europe, Japan, Australia — and just about any developed country. Chinese — from young people to entrepreneurs — are voting with their feet to escape political oppression, bleak economic prospects… Increasingly, the exodus includes tech professionals and other well-educated middle-class Chinese. …In 2022, despite passport and travel restrictions, more than 310,000 Chinese, on net, emigrated, according to the U.N. data. With three months to go this year, the number has reached the same level as the whole of 2022. …Most of the tech professionals I talked to took a pay cut when they emigrated. “I feel like I’m paying for liberty,” said…a U.S.-educated software engineer who quit his job at an autonomous-driving start-up in Beijing. He now works at an automobile company in Western Europe.

This out-migration is basically a referendum on China’s economic future, and people are voting against bad policy by leaving the country. Including lots of rich people.

Just like people in California, New York, and Illinois are voting against bad policy by leaving those states.

Since I’ve expressing pessimism about China’s future, here’s a tweet from yesterday the helps to further explain my sour outlook.

China is already suffering because of bad economic policy, yet at least one former official wants to make a bad situation even worse with huge tax increases. https://t.co/byVjhtUO76 https://t.co/NdrlHl5vBW

— Dan Mitchell (@danieljmitchell) October 2, 2023

At the risk of understatement, this is a staggeringly bad idea. China already suffers from awful industrial policy. Imposing European-level taxes would made a bad situation even worse.

Though the fiscal illiterates at the OECD and IMF would be happy.

P.S. I’m amazed that some American politicians want to copy China’s mistakes.

P.P.S. The official economic numbers in China are bad. The unofficial numbers are far worse.

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The Slow-Motion Suicide of New York and California

Two of the worst states for tax policy are California and New York.

They have punitive income tax rates, high sales taxes, and myriad other ways of diverting money from the productive sector of the economy to finance bloated public sectors.

I’ve written several time that greedy politicians in these states are driving away taxpayers. Simply stated, successful people are “voting with their feet” and choosing to move to states with lower tax burdens.

Especially states with no income taxes.

But it’s not just people that are moving. As shown by these maps, money is also escaping from California and New York.

The above map comes from Linly Lin and Tom Maloney, who wrote a column for Bloomberg about money-management firms fleeing high-tax states.

Here are some excerpts from their report.

The drip, drip, drip of the finance industry’s exit from New York and California has been measured anecdotally… Elliott Management decamped to West Palm Beach. AllianceBernstein to Nashville. Charles Schwab moved to suburban Dallas. Now, for the first time, there are hard numbers quantifying the exact scope of the exodus. Both states have in the past three years lost firms that managed close to $1 trillion of assets…The exodus from the Northeast and West Coast has meant the loss of thousands of high-paying jobs, straining city and state finances by sapping tax revenue. …The moves, often born out of a desire for lower taxes, …spurring plenty of angst in the places left behind… From the start of 2020 through the end of March 2023, more than 370 investment companies — about 2.5% of the US total, and managing $2.7 trillion in assets — moved their headquarters to a new state. The vast majority of the migration was out of high-cost-of-living locales in the Northeast and on the West Coast and into Florida, Texas and other Sun Belt refuges.

Here’s another map from the column.

In this case, the authors look at how Texas and Florida are the main beneficiaries of America’s internal money migration.

By the way, I think taxes play a much bigger role than weather.

Nobody moves from California to Texas for the climate. Meanwhile, it’s possible that weather helps to explain the big shift from New York to Florida, but keep in mind that most people find Florida summers just as unpleasant as New York winters.

I’ll close by noting that red states have been outperforming blue states, and this Bloomberg data is another piece of powerful evidence to add to our collection.

P.S. My series on Texas vs California and Florida vs New York  also show the superiority of low taxes compared to higher taxes. Maybe, just maybe, there’s a lesson to be learned.

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Blue-to-Red Migration, Part III: The Slow-Motion Suicide of High-Tax States

In Part I and Part II of this series, we looked at how taxpayers are moving from high-tax states to low-tax states.

For Part III, let’s start with a map from the Tax Foundation, which shows which states are winning and losing as Americans vote with their feet.

People moving is only part of the story. We also need to look at who is moving.

That can have major implications for a state’s long-run competitiveness. Or even its fiscal viability.

Here are some excerpts from a column I wrote for Bloomberg.

States want to make sure they attract—or at least don’t lose—rich people. Upper-income taxpayers pay a disproportionate amount of taxes (just like they pay the lion’s share of federal taxes), and states that attract such residents are fiscal winners. …IRS data shows that high-tax states such as California, New York, and Illinois are losing tens of thousands of successful residents to low-tax states, with zero-income-tax Florida being a preferred destination. But what really matters from a fiscal perspective is that those tens of thousands of people leaving higher-tax states account for tens of billions of dollars of taxable income. This is a dangerous trend for the nation’s high-tax states. Simply stated, a government needs an acceptable ratio of people pulling the wagon versus those riding in the wagon. Otherwise, as former British Prime Minister Margaret Thatcher famously warned, they’ll “run out of other people’s money.” …high-tax states…face a grim future as more and more taxpayers do a cost-benefit analysis and decide whether they get enough value from government to justify punitive income tax rates (topping out at more than 10 percent in California, New York, and New Jersey). Based on current trends, expect a growing number of those taxpayers to “vote with their feet.”

The Tax Foundation study cited above, authored by Katherine Loughead, has some sobering data showing how interstate migration creates winners and losers.

The IRS data also show interstate migration broken down by AGI level. Among taxpayers with $200,000 or more in AGI, the top destinations for inbound interstate moves were Florida, Texas, Arizona, North Carolina, and South Carolina. Meanwhile, the states that saw the largest losses of taxpayers with $200,000 or more in AGI were New York, California, Illinois, Massachusetts, and Virginia. Several of the states losing higher-income taxpayers, especially New York, California, and New Jersey, have highly progressive tax codes under which tax liability rises steeply with income. States that structure their tax codes in this manner have consistently lost higher-income residents to lower-tax states, and not only the residents, but also any associated tax revenue and entrepreneurial activity that goes along with them.

Let’s close with a look at how California is a big net loser.

A TV station in Los Angeles, KTLA, reports on how the state is suffering from an exodus of people who are net tax-payers.

For the third straight year, the state of California has experienced a decline in population, according to U.S. Census Bureau data, and many of those packing up and heading east are some of the state’s wealthiest. A study of IRS Migration Data by an online real estate portal found that no state experienced a larger loss of tax income from migration than California. The study, conducted by MyEListing.com, found that California lost more than $340 million in 2021 IRS tax revenue due to residents moving. …“Despite its numerous attractions … beautiful landscapes and cultural richness, California’s high personal income tax rates seem discouraging for many high-wealth individuals. This, coupled with the state’s high cost of living, will likely fuel a wealth migration out of California,” the website wrote in its analysis. California is the entertainment capital of the world as well as home to Silicon Valley, but it appears some of the highest earners no longer need to keep their California residency to maintain their careers and businesses.

I’ll conclude by emphasizing that a state can get in fiscal (and economic) trouble if it drives away net tax-payers and attracts net tax-consumers.

As I wrote for Bloomberg, it is not a good idea to have lots of people riding in the wagon and too few people pulling the wagon. That’s bad for states, and it’s bad for nations.

P.S. While California does not have a very encouraging fiscal outlook, it is not the state viewed as most likely to go bankrupt.

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Blue-to-Red Migration, Part II

In Part I of this series, I shared some excerpts from a Wall Street Journal editorial that documented how taxpayers fleeing high-tax states such as California, New York, Illinois, and New Jersey.

Where are they going? In many cases, they are moving to zero-income-tax states such as Florida and Texas or flat-tax states such as Arizona and North Carolina.

This is not a new phenomenon. I first started writing about tax-motivated migration in early 2010.

And I suspect there will be many future columns, particularly since an impressive number of states have been improving their tax systems.

For Part II in this series, let’s look at some excerpts from an article by Patrick Villanova for Yahoo!Finance. Here are some excerpts.

When a state loses more high-earning tax filers than it gains in a given year, tax revenues may decline and the state’s fiscal situation may worsen. That’s why despite making up less than 7% of total tax returns filed across the 50 states and the District of Columbia in 2020, the migration patterns of high-earning households continue to make headlines. With this in mind, SmartAsset set out to identify the states with the most movement of high-earning households. To do this, we examined the inflow and outflow of tax filers making at least $200,000 in each state between 2019 and 2020. …There are nine states in the country that do not tax income at the state level. Four of those states – Florida, Texas, Tennessee and Nevada – are among the 10 places with the largest net inflow of high-income households. …No state is gaining more high-earning households than Florida…a net addition of 20,263 high-income filers. Like Florida, Texas – the No. 2 ranking place – does not have state income tax. …It’s no surprise that most of the states with the highest net losses of households earning over $200,000 are traditionally viewed as high-tax states. New York saw a net outflow of nearly 20,000 high-earning households in 2020, more than any state in our study. …California wasn’t far behind, losing a net figure of 19,229 high-earning filers.

This is a story about people “voting with their feet,” but there are also very important implications for state finances.

Every state has people who pay taxes (workers and businesses in the private sector) and people who consume taxes (bureaucrats, welfare recipients, interest groups, etc).

However, if a state is losing the former and retaining (or even attracting) the latter, that’s a recipe – sooner or later – for Greek-style fiscal trouble.

Which is why I have sometimes speculated that states such as California are committing slow-motion suicide.

P.S. Switching to a different topic, the article notes that, “D.C. has the largest proportion of high-earners… Households earning at least $200,000 per year make up 12.19% of all tax filers in the District of Columbia.” Unfortunately, this is not a sign that DC has good fiscal policy. Indeed, the opposite is true. What it does show is that it is very lucrative to be a bureaucrat, lobbyist, politician, or some other type of “beltway bandit.” The only solution to this problem is to shrink the size and scope of the federal government.

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Blue-to-Red Migration, Part I

I realize it’s not nice to take pleasure in the misfortune of others, but that rule does not apply when bad things happen to greedy politicians.

As such, I greatly enjoy reading about when taxpayers “vote with their feet” by moving from high-tax jurisdictions to low-tax jurisdictions.

I enjoy when there is tax-motivated migration between nations.

And I enjoy when there is tax-motivated migration between states.

Regarding the latter version, there’s a must-read editorial in the Wall Street Journal about the ongoing exodus from fiscal hellholes such as Illinois, New York, and California.

The IRS each spring publishes data on the movement of adjusted gross income (AGI) and taxpayers across state lines from year to year. …the IRS data shows blue states are losing taxpayers and income at an increasing clip. …a net 105,000 people left Illinois in 2021, taking with them some $10.9 billion in AGI. That’s up from $8.5 billion in 2020 and $6 billion in 2019. New York’s income loss increased to $24.5 billion in 2021 from $19.5 billion in 2020 and $9 billion in 2019. California lost $29.1 billion in 2021, more than triple what it did in 2019. By contrast, the lowest tax states added some $100 billion of income during the pandemic. Zero-income-tax Florida gained $39.2 billion—up from $23.7 billion in 2020 and $17.7 billion in 2019. About $9.8 billion of the total arrived from New York, $3.9 billion from Illinois, $3.7 billion from New Jersey and $3.5 billion from California. Texas was another winner, attracting a net $10.9 billion in 2021, which follows a gain of $6.3 billion in 2020 and $4 billion in 2019. Californians represented more than half of Texas’s income gain in 2021.

Congratulations to Texas and Florida. Having no income tax is definitely a smart step.

Here is a chart that accompanied the editorial.

By the way, migration is the headline event, but it is also important to pay attention to who is migrating.

The WSJ‘s editorial notes that the people leaving high-tax states tend to be economically successful.

The IRS data shows that the taxpayers leaving Illinois and New York typically made about $30,000 to $40,000 more than those arriving. Of Illinois’s total out-migration, 28% of the leavers made between $100,000 to $200,000 and 23% made $200,000 or more. By contrast, the average return of a Florida newcomer in 2021 was about $150,000—more than double that of taxpayers who left. High earners spend more, which yields higher sales tax revenue. This helped Florida post a record $22 billion budget surplus last year. California is forecasting a $29.5 billion deficit.

In other words, the geese with the golden eggs are flying away.

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The Negative Economic Effects of State Death Taxes

I’ve written many times about the harmful consequences of the federal death tax. Simply stated, it is both immoral and foolish for the IRS to grab as much as 40 percent of someone’s assets simply because they die.

That drains private capital from the economy and is a de facto heavy tax on those who save and invest (triple or quadruple taxation!).

That’s the bad news.

The worse news is that some states augment the damage with their own death taxes. Here’s a map from the Tax Foundation showing which states shoot themselves in the foot.

For those curious, the estate tax is imposed on the dead person’s assets and an inheritance tax is imposed on the the people who inherit the dead person’s assets.

In both cases, it’s bad news.

How bad?

There’s some new research from a couple of scholars examining this topic. Enrico Moretti of Berkeley and Daniel J. Wilson of the San Francisco Federal Reserve have a study published by the American Economic Journal that quantifies the impact of state death taxes on location choices.

In this paper, we contribute to the literature on the effect of state taxes on the locational choices of wealthy individuals by studying how estate taxes affect the state of residence of the American ultra-rich and the implications for tax policy. …Specifically, we estimate the effects of state-level estate taxes on the geographical location of the Forbes 400 richest Americans between 1981 and 2017. We then use the estimated tax mobility elasticity to quantify the revenue costs and benefits for each state of having an estate tax. We find that billionaires’ geographical location is highly sensitive to state estate taxes. Billionaires tend to leave states with an estate tax, especially as they get old. …On average, estate tax states lose 2.35 Forbes 400 individuals relative to non–estate tax states. …—21.4 percent of individuals who originally were in an estate tax state had moved to a non–estate tax state, while only 1.2 percent of individuals who originally were in a non–estate tax state had moved to an estate tax state. The difference is significantly more pronounced for individuals 65 or older… Overall, we conclude that billionaires’ geographical location is highly sensitive to state estate taxes. …We estimate that tax-induced mobility resulted in 23.6 fewer Forbes 400 billionaires and $80.7 billion less in Forbes 400 wealth exposed to state estate taxes.

What makes the study especially persuasive is that state death taxes suddenly no longer could be offset against federal death taxes because of a policy change in 2001.

That meant post-2001 data should look different. And that’s exactly what the authors found, as illustrated in Figure 6 of the study.

Here are some final excerpts from the conclusion.

The 2001 federal tax reform introduced stark cross-state variation in estate tax liabilities for wealthy taxpayers. Our findings indicate that the ultra-wealthy are keenly sensitive to this variation. Specifically, we find that billionaires responded strongly to geographical differences in estate taxes by increasingly moving to states without estate taxes, especially as they grew older. Our estimated elasticity implies that $80.7 billion of 2001 Forbes 400 wealth escaped estate taxation in the subsequent years due to billionaires moving away from estate tax states.

By the way, the study said that most states still wind up collecting net revenue because of death taxes.

In other words, the death tax revenue from remaining rich people is generally greater than the foregone income tax revenue because of those who left.

But I wonder if those findings would be true if the authors had been able to measure the secondary effects such as lost sales tax revenue, lost property tax revenues, and (perhaps most important) lost income tax revenue from people who did business with escaping rich people.

But, regardless of the findings, it is always immoral and wrong for politicians to impose taxes simply because someone dies.

P.S. In Australia, people changed when they died because of the death tax.

P.P.S. In France, people changed who they were because of the death tax.

P.P.P.S. In Ireland, people pretended to change their sexual orientation because of the death tax.

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Continuing Migration from Blue States to Red States

I wrote a few days ago about how some New York Democratic politicians have awakened to the fact that it’s not a good idea to be too greedy.

After all, if taxes are excessively high, the geese with the golden eggs can simply fly away – and that can mean less tax revenue.

But I warned that saying no to additional tax increases was a necessary but not sufficient condition.

…the “good news” from New York is that politicians want to freeze the current (very bad) policy in place. That’s better than galloping faster in the wrong direction, of course, but a far cry from what’s needed.

Here’s some evidence for my assertion, courtesy of some new data from the Census Bureau. Like we saw last year, New York continues to lose population compared to the rest of the country.

Unsurprisingly, Illinois shows up again as a state with very high levels of out-migration as well.

John Phelan of the Center of the American Experiment put together a ranking of the states based on these annual population changes.

Obviously, people move between states for reasons other than economic policy, but it’s impossible not to notice that there’s an overall trend of red states gaining people and blue states losing people.

In other words, state economic policy matters.

P.S. In the past, skeptics used to claim that state migration trends were simply a story of people moving to states with better climates. That presumably is part of the story, but notice how California (the state that arguably has the nation’s best climate) is now a net loser and routinely gets mocked for driving away jobs and people.

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An Overdue Wake-Up Call for New York Democrats?

The economic outlook in New York (both the state and the city) has been very depressing in recent years.

• New York is ranked #50 in the Economic Freedom of North America.
• New York is ranked #48 in the State Business Tax Climate Index.
• New York is ranked #50 in the Freedom in the 50 States.
• New York is next-to-last in measures of inbound migration.
• New York is ranked #50 in the State Soft Tyranny Index.

That’s a very depressing list. New York’s low rankings are rivaled only by a few other outlier states such as California and New Jersey.

But maybe a turnaround is possible.

There are two recent signs of rationality, one in New York City and one in Albany (the state’s capital).

Let’s start with this tweet from Phil Kerpen, which features some comments from Mayor Adams of New York City.

Remarkably, the Mayor understands it is not a good idea if the geese with the golden eggs fly away.

"To continually attack high income earners when 51% of our taxes are paid by 2% of New Yorkers — this blows my mind when I hear people say 'so what if they leave.' No you leave! I want my high income earners right here in this city!" pic.twitter.com/iBONQoNZI4

— Phil Kerpen (@kerpen) December 15, 2022

I don’t know if the Mayor’s comments will actually translate into better policy, but it certainly seems like he has a better understanding of reality than his predecessor.

Now let’s shift to the state level.

The Wall Street Journal opines about a potential outbreak of rationality by the state’s governor.

’Tis the season for epiphanies, and what do you know? It’s finally dawning on some New York Democrats that the state’s steep income tax rates are driving away top earners who fund essential public services. …miracles of miracles, Gov. Kathy Hochul last week ruled out tax increases and said she planned to hold the line on spending next year. “I don’t believe that raising taxes…makes sense,” she said. …A New York City Independent Budget Office report this month showed that the number of taxpayers who earned between $1 million and $5 million plunged 11% in 2020 from the prior year. …The culprits are high taxes and Covid lockdowns. According to IRS data, New York County lost $14.5 billion in adjusted gross income from out-migration between 2019 and 2020. And this was before Democrats in Albany last spring raised income taxes on individuals making more than $1 million, jacking up the combined state and New York City top rate to 14.8% from 12.7%. Even New York Comptroller Thomas DiNapoli, who is no moderate, told Bloomberg News last week that the exodus of taxpayers at the upper end “should be a concern for everybody.” He added that “we might be getting near that tipping point where we do make it economically unsustainable for enough of those folks to stay here.”

For what it’s worth, I think New York already passed the tipping point. Thousand and thousands of well-to-do taxpayers have already escaped and moved to zero-income-tax Florida.

That means New York’s parasitical politicians have lost billions and billions of tax revenue. And I suspect that’s why we are seeing some semi-sensible comments from the Mayor and the Governor.

Let’s close with a depressing observation. The reason the comments from the Mayor and Governor are “semi-sensible” is that they are only saying there should be no more tax increases.

That’s not the same as saying that there should be tax cuts. Or TABOR-style spending caps.

In other words, the “good news” from New York is that politicians want to freeze the current (very bad) policy in place. That’s better than galloping faster in the wrong direction, of course, but a far cry from what’s needed.

Especially when many other states are seizing opportunities to become more competitive.

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Socialism and Immigration

I’ve written many columns about the migration from high-tax states to low-tax states.

The obvious takeaway is that people want to move to places where they can keep more of their money. And if they don’t have money, they want to move to places where lower tax burdens create more economic opportunity.

The same principle is true when considering international migration.

Nations with lower tax burden attract more investors, entrepreneurs, and job creators. And they also attract the people who want the new jobs that are created.

We’re seeing an example of this in the Western Hemisphere.

Charles Lane of the Washington Post has a very good column today, explaining a big reason why so many migrants are coming to the United States.

…the exodus from failed left-wing Latin American regimes has global repercussions…many people seeking relief from poverty and oppression go to the wealthiest and freest nation in their own hemisphere: the United States. Right now, escapees from Cuba, Venezuela and Nicaragua make up a rapidly growing share of the influx at the border between the United States and Mexico. …All of the above should inform the debate about “root causes” of migration… the historic debacle represented by the departure of over 6 million from Venezuela… That is a fifth of the entire country. …The foreseeable failure of subjecting the economy to top-down control and denying people basic freedoms can.The exodus is thus a tremendous compliment to the United States and other democratic capitalist countries.

As I said, a very good column. I feel obliged to point out that Mr. Lane was being redundant when he wrote “failed left-wing,” but let’s conclude by examining a couple of policy issues.

First, some people argue that illegal migration can be reduced if American taxpayers send foreign aid to Latin America. But since foreign aid tends to subsidize bad policy, that approach almost surely will backfire.

Second, we should make sure the people who come to America are arriving for opportunity rather than handouts. That’s true whether we have a restrictive policy or an open-door policy.

P.S. The second point doesn’t apply for potential migrants from countries such as Denmark that have overly generous welfare policies.

P.P.S. It’s a problem that Biden wants to drive away highly productive people.

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In One Chart, Everything You Need to Know about China

I’m obviously exaggerating when I write an “everything you need to know” column.

But I use that kind of title when sharing a story that highlights some sort of fundamental truth.

And one of my long-standing observations is that China’s economy is not nearly as strong as some people think. Which is why I’m sharing this chart from a recent Bloomberg report about China.

At the risk of understating, it’s good news if rich people want to migrate to your country and it’s bad news if they want to leave your country.

It’s easy to understand why rich people want to leave Russia. Putin is making the country an international pariah.

But look at China, which has the world’s second-largest number of high-net-worth emigrants.

The Bloomberg report, authored by Lisa Du, Amanda Wang, Zheng Li, elaborates on the exodus.

The big question now hanging over China’s rich is whether President Xi Jinping’s government will let them leave. …immigration lawyers say moving has become more difficult in recent months as passport processing times have increased and documentation requirements have become more onerous. Shifting large sums of money out of China has also become harder… That’s setting the stage for a fresh bout of tension between wealthy Chinese and the ruling Communist Party, which was already strained amid President Xi Jinping’s populist campaign for “common prosperity.”

As far as I’m concerned, the underlying issue is that China has been drifting back to authoritarian statism under President Xi

The fact that people and money have been escaping is a symptom of that problem.

Here are some more details.

The potential departures of people and capital are “a definite cost to the Chinese economy,” said Nick Thomas, an associate professor at the City University of Hong Kong… In another sign of the national mood, a recent note from Shanghai-based billionaire Huang Yimeng announcing to employees that he plans to move his family out of China went viral on social media. …Still, “there are lots of institutional barriers” to leaving China, said Jennifer Hsu, a research fellow at the Lowy Institute think tank in Sydney, Australia… Would-be emigrants also need to get savvier at moving money out of China. Citizens are only allowed to convert $50,000-worth of yuan into foreign currency each year. In the past, wealthier people have found ways around the rule, but some of those options are dwindling.

The bottom line is that the Chinese government presumably can make it more difficult for people to escape.

But that does not solve the underlying problem.

At the risk of oversimplifying is that China was horrendously poor under Mao’s doctrinaire socialism, but then enjoyed some growth after partially liberalizing its economy beginning in the last 1970s/early 1980s..

But there has not been any meaningful pro-market reform in the past 15-20 years and now China is losing ground.

No wonder successful people want to escape.

P.S. Encouraged by bad advice by the OECD and IMF, China has been pursuing bad policy in recent years.

P.P.S. Instead of threatening to invade Taiwan, Xi should by copying its small-government policies (or the pro-market policies of the other Asian Tigers).

P.P.P.S. Given China’s increased influence, I’m also not surprised that many successful people are now escaping Hong Kong.

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Attract the Best and the Brightest with Low Tax Rates

I’ve written many times about the importance of low tax rates, specifically low marginal tax rates on productive activity such as work, saving, investment, and entrepreneurship.

And I’ve explained that it is especially beneficial to have low tax burdens to attract people who play a big role in boosting economic growth.

• Entrepreneurs
• Inventors
• Innovators

The bottom line is that everyone should want their state or their country to be a magnet for the best and brightest.

Having more highly successful people is a great shortcut for boosting everyone’s income.

Today, we’re going to look at more evidence on this topic. In a working paper for the Harvard Business School, Sari Pekkala Kerr, Çağlar Özden, William Kerr, and Christopher Parsons examine the migratory patterns of highly skilled workers.

Highly skilled workers play a central and starring role in today’s knowledge economy. Talented individuals make exceptional direct contributions—including breakthrough innovations and scientific discoveries… The exceptional rise in the number of high-skilled migrants to OECD countries is the result of several forces, including increased efforts to attract them by policymakers as they recognize the central role of human capital in economic growth… For example, immigrants account for some 57 percent of scientists residing in Switzerland, 45 percent in Australia, and 38 percent in the United States (Franzoni et al. 2012). In the United States, 27 percent of all physicians and surgeons and over 35 percent of current medical residents were foreign born in 2010. …the global migration rate of inventors in 2000 stood at 8.6 percent, at least 50 percent greater in share terms than the average for high-skilled workers as a whole.

In the contest to attract skilled migrants, some nations do a better jobs than others.

…among OECD destinations, the distribution of talent remains skewed. Four Anglo-Saxon countries—the United States, the United Kingdom, Canada and Australia—constitute the destination for nearly 70 percent of high-skilled migrants (to the OECD) in 2010. The United States alone has historically hosted close to half of all high-skilled migrants to the OECD and one-third of high-skilled migrants worldwide.

Here’s a chart looking specifically at inventors.

So why do some nations get disproportionate numbers of skilled migrants.

As you might suspect, these highly productive people want to earn more money. And keep more money.

The core theoretical framework for studying human capital flows dates back to at least John Hicks (1932), who noted that “differences in net economic advantages, chiefly differences in wages, are the main causes of migration.” …the United States has a very wide earnings distribution and low tax levels and progressivity, especially compared to most source countries, including many high-income European countries. As a result, we can see why the United States would attract more high-skilled migrants, relative to low-skilled migrants and relative to other high-income countries.

Notice, by the way, that low-tax Singapore and low-tax Switzerland also are big winners in the above chart. Indeed, they may be ahead of the United States after adjusting for population.

The obvious takeaway is that the United States should not throw away its competitive advantage. Yet another reason to reject Joe Biden’s class-warfare fiscal agenda.

 

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Illinois and Fiscal Suicide, Part II

Yesterday’s column discussed Caterpillar’s decision to move its headquarters from high-tax Illinois to low-tax Texas.

Today, we have more bad news for the Prairie State.

A major investment fund, Citadel, also has decided to leave Illinois.

Is the company moving to a different high-tax state, perhaps California or New York? Maybe Connecticut or New Jersey?

Nope. Citadel is going to Florida, a state famous for having no income tax.

The Wall Street Journal opined this morning about Citadel’s move.

The first step to recovery is supposed to be admitting you have a problem. But Illinois Gov. J.B. Pritzker still won’t, even after billionaire Ken Griffin on Thursday said he’s moving his Citadel hedge fund and securities trading firm to Miami from Chicago. …Meantime, Democrats in Springfield continue to threaten businesses and citizens with higher taxes… It’s no wonder so many companies and people are leaving, and mostly to low-tax states. …In 2020, $2.4 billion in net adjusted gross income moved to Florida from Illinois, about $298,000 per tax filer. …Mr. Griffin has spent tens of millions of his personal fortune trying to rescue Illinois from bad progressive governance. Maybe he figures it’s time to cut his losses.

Other (former) Illinois residents cut their losses last decade.

Scott Shackford of Reason shared grim data at the end of 2020 about the ongoing exodus from Illinois.

For the seventh year in a row, census figures show residents moving out of Illinois in significant numbers. …Perhaps demanding that your excessively taxed residents give the government even more money is not the best way to keep those residents in your state… Over the course of the last decade, Illinois lost more than a quarter-million people…not even California…has seen Illinois’ population loss. …Government leaders have responded not with better fiscal management (the state’s powerful unions blocked pension reforms), but with more taxes and fees, even as residents leave.

The bottom line is that Illinois is currently losing people and businesses.

Just as it lost people and businesses last decade.

And you can see from this map that taxpayers also were fleeing the state earlier this century.

I’m guessing the state’s hypocritical governor probably thinks this is a good thing because the people who left probably didn’t vote for tax-and-spend politicians.

But that’s a very short-sighted viewpoint.

After all, parasites need a healthy host. If you’re a flea or a tick, it’s bad news if you’re on a dog that dies.

As Michael Barone noted many years ago, that’s a lesson that Illinois politicians haven’t learned.

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Americans Voting with their Feet against Statism

Federalism is very desirable because it allows different parts of the country to make different decisions, and this helps to teach us about what works. And what doesn’t.

It also means Americans can “vote with their feet” by migrating across local borders and state borders.

This happens a lot, as illustrated by this map from the Census Bureau.

While this map is fascinating, it also can be deceiving because some counties have very few people and others have millions of people.

It appears that internal migration might be a wash for states such as California and New York, for instance, since parts of both states are both green and purple.

If you look at a state-level migration map, however, you’ll find that both states lost population.

Why? Because big losses in some heavily populated cities (circled in red above) easily outweighed population gains in rural counties.

So why are people leaving some places? Are there lessons to be learned?

One obvious takeaway is that Americans are fleeing states governed by the left, as Kerry McDonald explains for the Foundation for Economic Education.

US Census Bureau data released in December showed that restrictive states such as California, Illinois, New York, and Massachusetts lost population between July 2020 and July 2021, while states with less-restrictive virus policies like Texas, Arizona, and Florida gained population during that time. …Fight or flight is a tough choice for families, but at least it’s a choice that Americans can enjoy thanks to federalism and the ability to vote with our feet.

And Americans are fleeing localities governed by the left, as Michael Barone explains in the Washington Examiner.

…the biggest losses, in both population and percentage loss, came in four of the nation’s six largest metropolitan areas: San Francisco/San Jose (-2.6 percent), New York (-1.8 percent), Chicago (-1.1 percent) and Los Angeles/Riverside (-0.8 percent). Each of the first three, in just 15 months from April 2020 to July 2021, lost a population that equaled 20 percent of their total population gain in the 20 years between 2000 and 2020. …it’s also noteworthy, and probably more permanent, that people with modest educations and incomes have fled far beyond the exurbs. …the nation’s population growth and its economic dynamism had been concentrated disproportionately in the exurbs, which typically have reasonable tax rates and development-friendly regulations. …the self-harm that liberal and progressive politicians have inflicted…voters even in New York, Chicago, Los Angeles, and San Francisco are recoiling.

The moral of the story is that voters sometimes make the mistake of voting for tax-and-spend politicians, but at least they have enough sense to then escape the places being harmed by statist policies.

P.S. Switzerland in the gold standard for federalism in the world, but Canada also deserves favorable attention. And I recently learned that there’s real federalism in Spain.

P.P.S. Sadly, federalism has declined in the United States.

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People Are Voting with Their Feet Against Statism

How do we know people don’t like taxes?

• They tend to reject candidates who support higher taxes, as George H.W. Bush and other politicians have learned.
• Then tend to vote against higher taxes when given an opportunity (though they sometimes will vote to tax other people)
• They tend to migrate from high-tax jurisdictions to low-tax jurisdictions for direct and indirect reasons.

Today, we’re going to elaborate on the final reason.

Let’s start with this chart from one of the daily missives from the Committee to Unleash Prosperity. As you can see, it’s not just people that move. It’s their money as well.

The bottom line is that the two states – California and New York – with ultra-high tax rates are losing the most taxable income.

Let’s call this the revenge of the Laffer Curve because it shows us that high tax rates can backfire.

Jon Miltimore addressed this topic in a new column for the Foundation for Economic Education.

Here are some of the highlights, starting with some data on how some poorly governed cities are losing residents.

Three of the top five metros that saw sharp declines between July 1, 2020, and July 1, 2021 were in California. Leading the way was the Los Angeles-Long Beach metropolitan area, which lost 176,000 residents, a 1.3 percent drop. Next was the San Francisco-Oakland-Berkeley metro, which saw a decline of 116,000 residents (2.5 percent decline), followed by San Jose-Sunnyvale-Santa Clara, which shed some 43,000 residents (2.2 percent drop). …The New York-Newark-New Jersey metropolitan area saw a decline of 328,000 residents, the highest in the nation in raw numbers. The Chicago area, meanwhile, saw a decline of some 92,000 residents.

Here’s a chart from his article.

I’m definitely not surprised to see New York, San Francisco, and Chicago on the list. After all those cities have crummy governments.

The other two cities, by contrast, just have the misfortune of being in a poorly governed state.

Jon explains a big reason why this domestic migration is taking place.

…the reasons people choose to migrate tend to be complex and varied… However, we can see the US flight from its largest metropolitan is part of a bigger trend. North American Van Lines (NAVL), a trucking company based in Indiana, puts out an annual report that tracks migration patterns in the United States. The states with the most inbound migration in 2021 were South Carolina, Idaho, Tennessee, North Carolina, and Florida. The leading outbound states were Illinois, California, New Jersey, Michigan, and New York. The pattern here is clear. Americans are fleeing highly-regulated, highly taxed states. They are flocking to freer states. …We heard a great deal about “the Great Reset” during the pandemic. …It may be that “the reset” involves Americans abandoning high-tax, high-regulatory cities and states for freer ones.

To be sure, there are factors other than taxation. And there are factors other than government policy (people really like California’s wonderful climate, for instance, but they will escape when policy becomes unbearable).

The bottom line is that people are slowly but surely voting with their feet against statism. They are choosing red states over blue states. There’s a lesson for Joe Biden, though he’s probably not listening.

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Americans Are “Voting with their Feet” against High Taxes

I’ve written many times about how Americans are moving from high-tax states to low-tax states.

Now we have even more evidence because the Census Bureau has issued its annual report on state population changes, along with this accompanying map.

You don’t need to be an expert in map reading to see that California, Illinois, and New York are losing people at the fastest rate (orange states).

Likewise, the states gaining population at the fastest rate (purple states) include Texas.

This chart from the Wall Street Journal shows the biggest changes, as measured by the number of people moving in and out.

To be sure, taxes are not the only factor that drive internal migration.

But it’s also clear that people tend to move to lower-tax states, either because they overtly want to keep more of their money, or because they are attracted to the job opportunities that tend to be more plentiful where taxes are lower.

As you might expect, the coverage from Fox News highlights the fact that people are leaving blue states and moving to red states.

Between 2020 and 2021, the country has seen the lowest population growth since its founding, at only a 0.1% increase, but the biggest declines have occurred in Washington, D.C., and Democrat-led states, according to a report Tuesday by the Census Bureau. …New York with a 1.6% decline, Illinois with a 0.9% decline, and Hawaii and California that both saw a 0.7% decline. Meanwhile, the states that saw the biggest increase in population growth were Republican-run states, starting with Idaho at a 2.9% increase, followed by Utah with 1.7%, Montana with 1.7%, Arizona with 1.4% and South Carolina with 1.2%. …Florida and Texas, each saw a population growth of 1%.

Citing a different report, he Wall Street Journal opined a few days ago about the implications of migration for Illinois.

The Land of Lincoln is one of only three states, including West Virginia and Mississippi, to have lost population since 2010. But its population over age 55 has grown as Baby Boomers have aged. …Illinois is losing young people while Florida is gaining them. State development specialist Zach Kennedy notes that “the U.S. population actually grew in the prime working age, young adult age cohorts, 25 to 29, 30 to 34 and 35 to 39 year olds.” Illinois was among the few states to see a decline in these age cohorts. …“Only New Jersey lost more college-aged individuals out of state who never returned,” Mr. Kennedy says. Hmmm. What do the two have in common? …a shrinking population of prime-age working people and children means a smaller tax base will have to support growing retirement liabilities. Folks who stick around will have to pay higher and higher taxes. …each Illinois household on average is on the hook for $110,000 in government-worker retirement debt, up from $90,000 in 2019. …The per-household pension burdens in Iowa and Wisconsin were $3,500 and $3,200, respectively. Both states have gained young people. State and local government in Illinois is run by public-worker unions, and people are fleeing the economic and fiscal consequences.

The most important sentence in the preceding excerpt points out that “Folks who stick around will have to pay higher and higher taxes.”

And that will encourage even more of them to leave, which leads to even-further pressure for higher taxes on the chumps who remain.

Needless to say, that won’t end well, for Illinois or other blue states. Either they go bankrupt or future politicians do a big blue-state bailout.

P.S. This helps to explain why curtailing the federal tax code’s subsidy for excessive state and local tax burdens was so important.

P.P.S. This is also why federalism is both good politics and good policy.

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Illinois and the Consequences of Bad Tax Policy

At the risk of understatement, Illinois is not a well-governed state. Greedy (and hypocritical) politicians have taxed and spent the state into a fiscal hole.

• It ranks in the top 10 for unemployment.
• It ranks in the bottom 10 for Tax Freedom Day.
• It ranks a lowly #34 for economic freedom.
• It ranks in last place for fiscal conditions.
• It ranks #36 for overall economic liberty.
• It ranks third from last the Governor’s Report Card.

Wow. No wonder people have overwhelmingly voted that it is the state most likely to go bankrupt.

As illustrated by the collection of links, there certainly is a lot of data to support the notion that Illinois is in a downward spiral.

But sometimes an anecdote can help drive home the point. The Wall Street Journal just published a story about the country in Illinois that has suffered the largest decline in population of anyplace in the United States.

What struck me most about the report was that it “buried the lede.” More specifically, it’s not until the 17th paragraph that we learn about the factor that is probably responsible for a big chunk of the out-migration.

This must be the journalistic equivalent of “Other than that, Mrs. Lincoln, how was the play?”

Though I’m sure the other factors listed in the article also are relevant.

I’ll close with some speculation about an oft-seen pattern in blue states, which is the way rural areas and poor urban areas keep falling farther and farther behind well-to-do suburbs and wealthy downturn business districts.

Is it random results or a consequence of policy choices? Do politicians in California only care about preserving quality of life for coastal elites? Do politicians in Illinois merely care about Chicago and its suburban counties? Do politicians in New York not care about upstate residents?

I don’t know the answer to those questions, but I do know that people are voting with their feet to escape the states with the most-punitive tax policy.

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Will High-Value Taxpayers Vote with their Feet Against Biden?

For most of the world, American citizenship is highly coveted. Indeed, foreigners have even been willing to invest a lot of money to increase the odds of getting to the United States.

But changing one’s nationality is a two-way street. Beginning with the Obama years, there’s been a big jump in the number of Americans willing to give up U.S. citizenship.

This is mostly because of bad tax policy (high rates, double taxation, FATCA, etc).

Simply stated, these successful households make a completely rational assessment that the benefits of being an American aren’t worth the fiscal costs.

Especially if they already live overseas and are being victimized by “worldwide taxation.”

Sadly, it’s quite likely that more Americans will be giving up their citizenship if Biden is able to push through his class-warfare tax agenda.

Jennifer Kingson explains in an article for Axios.

The number of Americans who renounced their citizenship in favor of a foreign country hit an all-time high in 2020: 6,707, a 237% increase over 2019. …While the numbers are down this year, that’s probably because many U.S. embassies and consulates remain closed for COVID-19, and taking this grave step requires taking an oath in front of a State Department officer. …The people who flee tend to be ultra-wealthy, and many of them are seeking to reduce their tax burden. New tax and estate measures proposed by the Biden administration could, if implemented, accelerate this trend. …The IRS publishes a quarterly list of the names of people who have renounced their citizenship or given up their green cards. The numbers started swelling in 2010, when Congress passed the Foreign Account Tax Compliance Act, or FATCA, which increased reporting requirements and penalties for expats.

Here’s a chart from the article.

I speculated last year that the 2016-2019 drop was an indicator that Trump’s tax cut was having a positive impact.  But the spike in 2020 suggests I was being too optimistic.

Here’s some more analysis from the article.

As you can see, there’s a big backlog, so we only speculate how many Americans will be escaping the IRS in coming years.

David Lesperance, an international tax lawyer based…who specializes in helping people renounce U.S. citizenship, says that with coronavirus shutting down interviews for renunciation, the next lists will only contain relinquished green card holders, who can do it by mail. “There are probably 20,000 or 30,000 people who want to do this, but they can’t get the appointment,”…”It’s a year-and-a-half to get an appointment at a Canadian embassy,” he tells Axios. “Bern [Switzerland] alone has a backlog of over 300 cases.” …A lot of people who take this drastic step are tech zillionaires: Eric Schmidt, the former Alphabet CEO, has applied to become a citizen of Cyprus. …President Biden has proposed raising the top capital gains tax to 43.4%, and while it’s unclear whether that will pass, it did prompt a lot of calls to Lesperance from people wanting to find out which foreign countries might grant them citizenship.

By the way, this issue has macro consequences for the rest of us. Given the economic importance of innovators, entrepreneurs, and inventors, it’s bad news for the United States when they move to low-tax nations such as Singapore.

P.S. Companies also move from one country to another so they can protect workers, consumers, and shareholders from bad tax policy.

P.P.S. One of the most odious parts of American tax law is the imposition of Soviet-style exit taxes on people who want to change citizenship.

P.P.P.S. Today’s column is about tax migration across national borders, but don’t forget there’s far more tax migration across state borders.

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The Continuing Story of Tax Migration

The bad news is that federalism has declined in the United States as politicians in Washington have expanded the size and scope of the national government.

The good news is that some federalism still exists and this means Americans have some ability to choose the type of government they prefer by “voting with their feet.”

1. They can choose states that tax a lot and spend a lot.
2. They can choose states with lower fiscal burdens.

You won’t be surprised to learn that people generally prefer option #2.

Researchers have found a significant correlation between state fiscal policy and migration patterns.

And it’s still happening.

In a column for the Wall Street Journal a few days ago, Allysia Finley and Kate LaVoie discuss some research based on IRS data about taxpayer migration patterns.

Here’s some of what they wrote.

New IRS data compiled by research outfit Wirepoints illustrate the flight from high- to low-tax states. …Retirees in the Midwest and Northeast are flocking to sunnier climes. But notably, states with no income tax (Florida, Nevada, Tennessee and Wyoming) made up four of the 10 states with the largest income gains. On the other hand, five of the 10 states with the greatest income losses (NY, Connecticut, New Jersey, Minnesota, California) ranked among the top 10 states with the highest top marginal income tax rates. …Florida gained a whopping $17.7 billion in AGI including $3.4 billion from New York, $1.2 billion from California, $1.9 billion from Illinois, $1.7 billion from New Jersey and $1 billion from Connecticut. California, on the other hand, lost $8.8 billion including $1.6 billion to Texas, $1.5 billion to Nevada, $1.2 billion to Arizona and $700 million to Washington.

Here’s a very informative visual, showing the share of income that either left a state (top half of the chart) or entered a state (bottom half of the chart).

Our friends on the left say that this data merely shows that retirees move to states with nicer climates.

That is surely a partial explanation, but it doesn’t explain why California – the state with the nation’s best climate – is losing people and businesses.

Heck, I even have a seven-part series (March 2010, February 2013, April 2013, October 2018, June 2019, December 2020, and February 2021) on the exodus from California to Texas.

Let’s return to the Finley-LaVoie column, because there’s some additional data that deserves attention. They point out that states with better policy are big net winners when you look at the average income of migrants.

The average taxpayer who moved to Florida from the other 49 states had an AGI of $110,000… By contrast, the average taxpayer who left Florida had an AGI of just $66,000. In sum, high-tax states aren’t just losing more taxpayers—they are losing higher-income ones. Similarly, low and no income states are generally gaining more taxpayers who also earn more. …When blue states lose high earners, their tax base shrinks, but their cost base continues to grow due to rich government employee pay, pensions and other benefits. …The result is that low-tax states are getting richer while those that impose higher taxes are getting poorer.

As you can see, Florida is a big beneficiary.

And I shared data a few years ago showing that states such as Illinois are big net losers.

Let’s conclude by asking why some politicians, such as the hypocritical governor of Illinois, don’t care when they’re on the losing side of these trends?

I don’t actually know what they’re thinking, of course, but I suspect the answer has something to do with the fact that departing taxpayers probably are more libertarian and conservative. So if you’re a big-spending politician, you probably are not very upset when migration patterns mean your state becomes more left-leaning over time.

That’s a smart political approach.

Until, of course, those states no longer have enough productive people to finance big government.

In other words, every government is limited by Margaret Thatcher’s famous warning.

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The Political Consequences of Tax Migration

When I ask my left-leaning friends what they think about the flight of investors, entrepreneurs, and business owners from high-tax states, I tend to get three responses.

1. It isn’t actually happening (these are my friends who apparently don’t know how to read).
2. It’s happening, but it doesn’t matter (data from the IRS suggests it actually is significant).
3. It’s happening, but high-tax states will be better off without these selfish and greedy people.

The folks making the third point actually have a decent argument, at least in terms of short-run political outcomes. Democrats rarely have to worry about retaining control of states like California, New York, Illinois, and New Jersey now that many Republican-leaning voters have moved away.

But sometimes short-run benefits are exceeded by long-run costs, and the recent data on congressional redistricting from the Census Bureau is a good example.

As you can see, there’s a continuing shift of political power – as measured by seats in Congress – from blue states to red states.

Patrick Gleason of Americans for Tax Reform explains what this means in a column for Forbes.

Over the past decade Americans have been voting with their feet in favor of states with lower overall tax burdens… As a result, high tax states…are set to lose congressional clout for the next decade, to the benefit of low tax states… the seven states that will lose congressional seats due to stagnant population growth have higher top income tax rates and greater overall tax burdens, on average, than do the six states gaining seats. In fact, the average top personal income tax rate for states losing seats in congress is 6.5%, which is 46% greater than the 4.45% average top income tax rate for states gaining seats.

Some people may want to dismiss Mr. Gleason’s column since he works for a group that supports smaller government.

But you can find the same analysis in this column in the Washington Post by Aaron Blake.

…what does the new breakdown mean from a partisan perspective? All told, five seats will migrate from blue states to red ones — owing to population shifts from the Rust Belt, the Northeast and California to the South and other portions of the West. Five of the seven seats being added also go to states under complete GOP control of redistricting, with three of seven being taken away coming from states in which Democrats have some measure of control over the maps. …That should help Republicans… The Cook Political Report estimates the shifts are worth about 3.5 seats… As for the electoral college in future presidential elections, …Michigan and Pennsylvania…are states Democrats probably need to win in the near future, meaning it’s probably a bigger loss for them. …If we reran the 2020 electoral college with the new electoral votes by state, Biden’s margin would shrink from 306-232 to 303-235. That seems negligible. But if you overlay the 2000 presidential results — three reapportionments ago — on the current electoral vote totals, George W. Bush’s narrow win with 271 electoral votes becomes a much more decisive win with 290. That gives you a sense where things have trended.

Let’s now return to the hypothesis that tax-motivated migration is playing a role.

Here’s an instructive tweet from Andrew Wilford of the National Taxpayers Union.

It should be not at all surprising to anyone that which states gained/lost Congressional seats from the latest apportionment tracks very strongly with the state's tax burden pic.twitter.com/DJRcNErNXm

— Andrew Wilford (@PolicyWilford) April 26, 2021

I’ll wrap up today’s column by augmenting the data in Mr. Wilford’s tweet.

Because not only are there, on average, lower tax burdens in the states gaining congressional seats, but every one of them has some very desirable feature of its tax code.

To be sure, not all of the state-to-state migration is due to tax policy. There are all sorts of other policies that determine whether a state is an attractive place for people looking to relocate.

And there are other factors (family, climate, etc) that have nothing to do with public policy.

All things considered, however, being a low-tax state means more jobs, growth, and people, at least when compared with being a high-tax state.

P.S. If you’re interested in seeing how states rank in various indices, click here, here, and here.

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New York’s Fiscal Suicide

The state of New York is an economic disaster area.

• New York is ranked #50 in the Economic Freedom of North America.
• New York is ranked #48 in the State Business Tax Climate Index.
• New York is ranked #50 in the Freedom in the 50 States.
• New York is next-to-last in measures of inbound migration.
• New York is ranked #50 in the State Soft Tyranny Index.

The good news is that New York’s politicians seem to be aware of these rankings and are taking steps to change policy.

The bad news is that they apparently want to be in last place in every index, so they’re looking at a giant tax increase.

The Wall Street Journal opined on the potential tax increase yesterday.

…lawmakers in Albany should be shouting welcome home. Instead they’re eyeing big new tax increases that would give the state’s temporary refugees to Florida—or wherever—one more reason to stay away for good. …Here are some of the proposals… Impose graduated rates on millionaires, up to 11.85%. …Since New York City has its own income tax, running to 3.88%, the combined rate would be…a bigger bite than even California’s notorious 13.3% top tax, and don’t forget Uncle Sam’s 37% share. …The squeeze is worse when you add the new taxes President Biden wants. A second factor: In 2017 the federal deduction for state and local taxes was capped at $10,000, so New Yorkers will now really feel the pinch. As E.J. McMahon of the Empire Center for Public Policy writes: “The financial incentive for high earners to move themselves and their businesses from New York to states with low or no income taxes has never—ever—been higher than it already is.”

The potential deal also would increase the state’s capital gains tax and the state’s death tax, adding two more reasons for entrepreneurs and investors to escape.

Here are some more details from a story in the New York Times by Luis Ferré-Sadurní and Jesse McKinley.

Gov. Andrew M. Cuomo and New York State legislative leaders were nearing a budget agreement on Monday that would make New York City’s millionaires pay the highest personal income taxes in the nation… Under the proposed new tax rate, the city’s top earners could pay between 13.5 percent to 14.8 percent in state and city taxes, when combined with New York City’s top income tax rate of 3.88 percent — more than the top marginal income tax rate of 13.3 percent in California… Raising taxes on the rich in New York has been a top policy priority of the Democratic Party’s left flank… The business community has warned that raising income taxes could prompt millionaires who have left the state during the pandemic and are working remotely to make their move permanent, damaging the state’s tax base. Currently, the top 2 percent of the state’s highest earners pay about half of the state’s income taxes. …The corporate franchise tax rate would also increase to 7.25 percent from 6.5 percent.

There are two things to keep in mind about this looming tax increase.

• First, New York politicians are ramming it through even though the state is getting all sorts of money from Washington thanks to Biden’s blue-state bailout (a big part of the so-called American Rescue Plan).
• Second, New York politicians are pushing through a huge tax hike even though the federal tax code no longer allows taxpayers to fully deduct state and local taxes (though they obviously hope to repeal that provision of the 2017 tax reform).

That second item is a big reason why so many taxpayers already have escaped New York and moved to states with better tax policy (most notably, Florida).

And even more will move if tax rates are increased, as expected.

Indeed, if the left’s dream agenda is adopted, I wouldn’t be surprised if every successful person left New York. In a column for the Wall Street Journal, Mark Kingdon warns about other tax hikes being considered, especially a wealth tax.

Legislators in Albany are considering two tax bills that could seriously damage the economic well-being and quality of life in New York for many years to come: a wealth tax and a stock transfer tax. …Should New York enact a 2% wealth tax, a wealthy New Yorker could wind up paying a 77% tax on short-term stock market profits. And that’s a conservative estimate: It assumes that stocks return 9% a year. If the return is 4.4% or less, the tax would be more than 100%. …65,000 families pay half of the city’s income taxes, and they won’t stay if the taxes become unreasonable… The trickle of wealthy émigrés out of New York has become a steady stream… It will be a flood if New York enacts a wealth tax with an associated tax on unrealized gains, which would lower, not raise, tax revenues, as those who leave take with them jobs and related services, such as legal and accounting. …The geese who have laid golden eggs for years see what is happening in Albany, and they’ll fly south to avoid being carved up.

The good news – at least relatively speaking – is that a wealth tax is highly unlikely.

But that a rather small silver lining on a very big dark cloud. The tax increases that will happen are more than enough to make the state even more hostile to private sector growth.

I’ll close with a few observations.

There are a few states that can get away with higher-than-average taxes because of special considerations. California, for instance, has climate and scenery. In the case of New York, it can get away with some bad policy because some people think of New York City as a one-of-a-kind place. But there’s a limit to how much those factors can be exploited, as both California and New York are now learning.

What politicians don’t realize (or don’t care about) is that people look at a range of factors when deciding where to live. This is especially true for successful entrepreneurs, investors, and business owners, who have both resources and knowledge to assess the costs and benefits of different locations. The problem for New York is that it looks bad on almost all policy metrics.

If the tax increases is enacted, expect to see a significant drop in taxable income as upper-income taxpayers either leave the state or figure out other ways of protecting their income. I don’t know if the state will be on the downward-sloping portion of the Laffer Curve, but it’s safe to assume that revenues over time will fall far short of projections. And it’s very safe to assume that the economic damage will easily offset any revenues that are collected.

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The Most Under-Noticed Development of 2020

If you ask normal people about the biggest thing that happened in 2020, they’ll probably pick coronavirus, though some might say the 2020 election.

But if you ask a policy wonk, you may get a different answer. Especially if we’re allowed to tweak the question a bit and contemplate the most under-appreciated development of 2020.

In which case, my answer would be interstate tax migration.

I’ve been writing about this topic for years, but it seems that there’s been an acceleration. And, as illustrated by this map, people are moving from high-tax states to low-tax states.

The map comes from an article by Scott Sumner of the Mercatus Center, and here’s some of his analysis.

The movement of these industries is toward three states that have one thing in common—no state income tax. …Progressives often discount the supply side effects of tax changes, pointing to examples such as Kansas where tax cuts had little effect. But Kansas…tax cuts were relatively modest. If you are looking for a low tax state on the Great Plains, South Dakota has no state income tax at all. The top rate in Kansas (5.7%) is higher than in Massachusetts (5.0%). That won’t get the job done. …I’m certainly not a rabid supply sider who thinks that tax rates are all important. But a person would have to be pretty blind to ignore the migration of firms from places like New York, New Jersey and California, to lower tax places. …Washington State has no income tax, which is unique for a northern state with a big city. Washington is also home to the two of the three richest people on the planet (the other–Elon Musk–just announced he’s moving from California to Texas.) …Washington is also experiencing rapid population growth, which is also unique for a northern state with a big city. …last year more that half of the US population growth occurred in just two states—Texas and Florida. …Add in Tennessee and Washington and you are at nearly two thirds of the nation’s population growth.

Wow, four states (all with no income tax) accounted for the bulk of America’s population growth. That’s a non-trivial factoid.

And I also think his observations about Kansas are spot on. Yes, the state improved it’s tax system, but it should have been bolder, like North Carolina.

The Washington Examiner recently opined on internal migration and also noted that people are escaping high-tax states.

…the state of Illinois has been a laggard in population growth. It has lost eight congressional districts since the 1950s. But new census estimates show that this decade, something very special has happened. …the land of Lincoln has lost a net 308,000 residents over the last seven years… And Illinois’s rapid shrinkage is occurring even as the United States grew by nearly 7% since the last census. …Illinois is not alone. The same census data point to two other big states that are also driving away residents with similarly impractical, ideologically leftist policies ⁠— California and New York. …New York, as a consequence, has also lost about 42,000 residents in the last decade. Its population peaked in 2015, and in the time since, it has lost about 320,000. A similar phenomenon is occurring in California, …with about 70,000 net residents vanishing in 2020. …residents are actually giving up and abandoning its beautiful, scenic inhabited areas. …the same census numbers show that people are gravitating toward states that have low or no income tax.

The mess in jurisdictions such as New York, California, Illinois, New Jersey, and Connecticut is so severe that I wasn’t sure how to vote in the first-to-bankruptcy poll.

And a recent editorial in the Wall Street Journal echoed these findings.

California’s population shrank for the first time as far back as records go (-69,532). According to a separate state government survey, a net 261,000 residents moved to other states during the period…many large businesses are shifting workforces to other states. …Last year Charles Schwab announced it is relocating its corporate headquarters to the Dallas region from San Francisco. Apple is building a new campus in Austin. Facebook this fall bought REI’s headquarters outside of Seattle. Oracle and Hewlett Packard Enterprise recently announced relocations to Texas. …Over the last decade, Illinois has lost 243,102 in population, about the size of Peoria and Naperville combined. …Democratic states in the Northeast last year lost population, led by New York (-126,355), Connecticut (-9,016) and New Jersey (-8,887). …By raising taxes again and again to pay for generous collective-bargained benefits, public unions are making Democratic states less competitive.

The final sentence is the above excerpt is especially insightful.

Among the states facing fiscal challenges, a common theme is that politicians and bureaucrats have a very cozy and corrupt relationship resulting in absurdly lavish (and unaffordable) compensation levels.

Let’s close with a bit of humor from the great cartoonist, Eric Allie. With all the interstate migration that happened last year, no wonder Santa Claus had some problems.

P.S. I also recommend this Lisa Benson cartoon, this Redpanels cartoon strip, and this Steven Breen Cartoon.

P.P.S. Even though it would be a massive tax cut for the rich, Democrats want to restore the state and local tax deduction. Even if they are successful, though, I suspect that change would only slow down the decline of blue states.

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Texas vs. California, Part VI

I asked a couple of years ago, “How long can California survive big government?”

Based on migration patterns, the answer is “Not much longer.” Simply stated, bad fiscal and regulatory policy have produced a long-run decline for the Golden State. So we shouldn’t be surprised that people are fleeing.

And it appears Californians like escaping to Texas, a state with no personal or corporate income tax.

I’ve written several times about the divergent performance of the two states.

• March 2010
• February 2013
• April 2013
• October 2018
• June 2019

So let’s make today’s column the sixth edition of Texas vs. California.

We’ll start with a column in the Wall Street Journal by Joe Lonsdale, a venture capitalist who explains why he and his company are moving to Texas.

I love California…and have spent most of my adult life in the San Francisco Bay Area, founding technology companies like Palantir and Addepar and investing in many others. In 2011 I founded 8VC, a venture-capital firm that today manages more than $3.6 billion in committed capital. …I am moving myself and dozens of my 8VC colleagues to a new land of opportunity: Texas. The harsh truth is that California has fallen into disrepair. Bad policies discourage business and innovation, stifle opportunity and make life in major cities ugly and unpleasant. …That’s not all. The California government is beholden to public-employee unions and spending is out of control. A broken environmental review process means it takes a decade of paying lawyers to build anything. Legislation makes it impossible for businesses to hire contractors without an exemption—granted by friends in the legislature, as with the music industry, or won by spending hundreds of millions on a referendum, as gig-economy companies with drivers just did. This isn’t how business is done in developed countries. …It’s tragic that California is no longer hospitable to that mission, but beautiful that Texas is. Our job as entrepreneurs and investors is to build the future, and I know of no better place to do so than Texas.

In a report for CNBC, Ari Levy and Lora Kolodny write about Elon Musk’s looming escape to the Lone Star State.

Tesla CEO Elon Musk put his California houses on the market this year while he was sparring with state lawmakers over Covid-19 restrictions. He’s simultaneously been expanding operations in Texas and cozying up to Republican Gov. Greg Abbott. Now, several of his close friends and associates say that Musk has told them he’s planning to move to the Lone Star State. …California, often condemned by the super rich for its high tax rates and stiff regulations, has seen an exodus of notable tech names… In May, as businesses across California were forced to remain closed because of the pandemic, Musk tweeted that he was moving Tesla’s headquarters and future development from California to Texas and Nevada. Getting out of California, with the highest income tax in the country, and into Texas, which has no state income tax, could save Musk billions of dollars.

Meanwhile, Hewlett Packard already has made the move, as reported by the Associated Press.

Tech giant Hewlett Packard Enterprise said it is moving its global headquarters to the Houston area from California, where the company’s roots go back to the founding of Silicon Valley decades ago. …”As we look to the future, our business needs, opportunities for cost savings, and team members’ preferences about the future of work, we are excited to relocate HPE’s headquarters to the Houston region,” CEO Antonio Neri said in a written statement… moving out of Northern California is a loss, at least symbolically, for the tech industry that electronics pioneers William Hewlett and David Packard helped start in a Palo Alto garage in 1939. A plaque outside the home where they worked on their first product, an audio oscillator, calls it the birthplace of Silicon Valley, the “world’s first high-technology region.”

To be sure, the three stories shared above are anecdotes.

But if you look at comprehensive data on both people and income, there’s a very clear pattern. Simply stated, Texas is winning and California is losing.

No, this doesn’t mean Texas is perfect. Or that California is always bad (it’s much better than Texas with regards to asset forfeiture, for instance).

But it’s hard to feel much optimism about the Golden State.

P.S. My favorite California-themed jokes (not counting the state’s elected officials) can be found here, here, here, and here. And here’s some tongue-in-cheek advice for California from the recently departed Walter Williams.

P.P.S. If you prefer comparisons of New York and Florida, click here, here, here, and here.

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Laughing at California’s Economic Decline

Back in 2013, I wrote about Phil Mickelson escaping high-tax California and moving to zero-income tax Florida.

The famed golfer grew up in California, but decided that the 2012 decision to boost the top tax rate to 13.3 percent mattered more than beautiful climate and wonderful scenery.

Needless to say, Mickelson’s not the only tax exile. Florida, Texas, Nevada, and other zero-income tax states receive a steady stream of entrepreneurs, investors, business owners, and others who are tired of California’s predatory politicians.

And celebrities as well. Yahoo! Entertainment reports that a famous rock star is leaving the not-so-Golden State.

Gene Simmons has put his longtime Beverly Hills mansion on the market for $22 million, citing California’s “unacceptable” tax rates as the reason for his move. After 34 years at the home, the KISS rocker and his wife Shannon are heading to Washington state. …In an interview with the Wall Street Journal, Simmons explained, “California and Beverly Hills have been treating folks that create jobs badly and the tax rates are unacceptable. I work hard and pay my taxes and I don’t want to cry the Beverly Hills blues, but enough is enough.”

When I read stories like this, I wonder if my friends on the left will learn any lessons about tax competition, the Laffer Curve, or the economic consequences of bad tax policy.

But I also confess that I’m amused by stories like this.

And so are the folks at America’s top site for satire, the Babylon Bee.

Here are some of their recent articles about California, starting with Governor Newsom’s plan to hinder the exodus of taxpayers.

In a move to prevent Californians from fleeing by the millions, Gavin Newsom announced a ban on gasoline automobiles this week. The law will make it so that Californians can’t drive away and escape the state in a matter of hours… “Now, they’ll have to cross the desert on foot,” Newsom said as he handed down the order. “I’ll show them, trying to flee my progressive utopia! Ha ha ha ha ha!”

The Governor apparently forgot to also ban trucks.

And U-Haul is taking advantage with a new advertising campaign.

To help meet the demand of millions of people desperately trying to escape the dark, ravaged wasteland of California, U-Haul is introducing a new product in its moving van line-up: the War Rig. These weaponized, armored moving vehicles will ensure you and your belongings stay safe during the long and perilous journey out of the state. …said local U-Haul franchise owner Glax Destroyer, who manages 12 locations in Southern California. “We brought in the War Rig to supplement our completely depleted fleet of moving vans. With everyone leaving in droves, we don’t have much left. We’re pretty much salvaging old trucks from the junkyard and then adding armor plating and mounted weapons.”

One problem, though, is that the people escaping from California bring along their bad political preferences.

Which has convinced Texas officials to impose a ban on their ability to vote.

To the relief of Texans across the state, Governor Greg Abbott has signed a law prohibiting escaping Californians from voting after they move to Texas. Experts say this will prevent the happy and prosperous slice of heaven from sliding into the endless despair and crushing poverty of leftist policy. …According to sources, emergency legislation was drafted after it was discovered that 97% of Californians favor destroying every small business on the planet and salting the earth where the businesses once stood. They also favor mandatory gay marriage and banning all country music to avoid hurting the ears of sea turtles. …Californians have marched on the state capital to demand their voting rights back, and have promised they’ll move on to Oklahoma after they finish destroying Texas.

On a serious note, there’s actually some evidence that the folks moving into Texas are more conservative than average.

And with regards to the big-picture issue of California policy, I recommend these columns from 2016 and 2020.

P.S. If you want data comparing Texas and California, click here, here, here, here, and here.

P.P.S. My favorite California-themed jokes (not counting the state’s elected officials) can be found here, here, here, and here.

P.P.P.S. Here’s some tongue-in-cheek advice for California from Walter Williams.

P.P.P.P.S. Even Bill Maher is upset about California taxes, though he hasn’t (yet) voted with his feet.

 

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Migration Patterns and Class-Warfare Taxation

When I opine about class-warfare taxation, I generally focus on the obvious argument that it’s not a good idea to penalize people for creating prosperity.

This argument against punitive tax policy is based on the fact that entrepreneurs, investors, business owners, and other successful people can choose to reduce their levels of work, saving, investment, and risk taking.

And it’s also based on the fact that they can shift their economic activity to tax-favored (but generally unproductive) sectors such as municipal bonds.

Moreover, I don’t want politicians to have more money to finance a bigger burden of government.

But we should also consider how class-warfare taxes also can cause the “geese with the golden eggs” to simply fly away.

The New York Times reports that one of the New York’s richest taxpayers is moving his business to Florida.

…on Wednesday, Mr. Singer, a billionaire who is one of the wealthiest people in the United States, revealed that he was moving his firm’s headquarters from Midtown Manhattan to West Palm Beach, Fla. …The departure by Elliott Management…follows a similar migration in recent years by other aging billionaire investors, including Carl C. Icahn, who left New York City for Florida, home to sunny weather, beaches and generous tax benefits… Mr. Singer’s move could bode ill for the city… New York City’s personal income tax revenue, which is heavily reliant on wealthy New Yorkers, is expected to drop by $2 billion this fiscal year. …For wealthy taxpayers, moving to Florida can provide a significant windfall. Unlike New York State, Florida has no individual income tax, estate tax or capital gains tax.

Singer’s move is just the tip of the iceberg.

A story in the Wall Street Journal earlier this year documented some of the tax-driven migration happening in the United States.

…the federal tax overhaul that Congress passed in late 2017…made it costlier to own a house in many high-price, high-tax areas… its effects are rippling through local economies and housing markets, pushing some people to move from high-tax states where they have long lived. Parts of Florida, for example, are getting an influx of buyers from states such as New York, New Jersey and Illinois. …the 2017 law…curbed how much homeowners can subtract from their federal taxes for paying local property and income taxes, by capping the state and local tax deduction at $10,000. …many residents in New York, New Jersey, Connecticut and California had been deducting well over $10,000 a year. …Mr. Lee estimates the move to Nevada, which has no state income tax, whacked his state tax bill by 90%. …Rick Bechtel, head of U.S. residential lending at TD Bank, lives in the Chicago area and said he recently went to a party where it felt like everyone was planning their moves to Florida. “It’s unbelievable to me the number of conversations that I’m listening to that begin with ‘When are you leaving?’ and ‘Where are you going?’ ” he said. …California has lost residents to Nevada for years, but that accelerated after the tax law passed. Nevada picked up a net of 28,000 people from California in 2018, according to the U.S. Census Bureau. …Mr. Belardi and Ms. LaPorte, who are planning to leave San Francisco, …have been growing tired of state and local politics, as well as the difficulty of running their two small businesses in California. …They estimate the move will save them tens of thousands of dollars annually. “I just hope all the Californians going to Nevada don’t turn Nevada into a California,” Mr. Belardi said.

By the way, there’s even tax-driven migration from some low-tax states to states with even lower taxes.

The dynamic is affecting even states typically thought to have low taxes. Mauricio Navarro and his family left Texas last year for Weston, Fla. Neither state collects its own income tax, but Mr. Navarro was paying more than $25,000 annually in property taxes in the Houston area, he said. …Filling out his 2018 tax returns helped motivate him to move with his wife and two children, said Mr. Navarro, who owns a software-development business.

And there’s tax-driven migration from high-tax nations to low-tax nations.

Here are some excerpts from some scholarly research in the Journal of Economic Perspectives, authored by Henrik Kleven, Camille Landais, Mathilde Muñoz, and Stefanie Stantcheva.

Here’s some of their background data.

Tax rates differ substantially across countries and across locations within countries. An important question is whether people choose locations in response to these tax differentials, thus reducing the ability of local and national governments to redistribute income… In this paper, we review what we know about mobility responses to personal taxation and discuss the policy implications. Our main focus is on the mobility of people, especially high-income people, but we will also discuss the mobility of wealth in response to personal taxes. It is clear that high-income individuals sometimes move across borders to avoid taxes. …The Rolling Stones left England for France in the early 1970s in order to avoid the exceptionally high top marginal tax rates—well above 90 percent—in the UK at the time. Many other British rock stars moved to lower tax jurisdictions, including David Bowie (Switzerland), Ringo Starr (Monte Carlo), Cat Stevens (Brazil), Rod Stewart (United States), and Sting (Ireland). In more recent years, actor Gérard Depardieu moved to Belgium and eventually Russia in response to the 75 percent millionaire tax in France, while a vast number of sports stars in tennis, golf, and motor racing have taken residence in tax havens such as Monte Carlo, Switzerland, and Dubai.

The authors point out that there are challenges, however, when trying to move from interesting anecdotes to statistically supported conclusions.

They overcome that challenge by examining a special tax regime in Denmark.

…the introduction of special tax schemes to foreigners provides such compelling quasi-experimental settings. Consider for instance the Danish tax scheme for foreigners… This scheme was enacted in 1992 and applied to the earnings of foreign workers from June 1991 onwards. Eligibility for the scheme requires annual earnings above a threshold located around the ninety-ninth percentile of the earnings distribution. Initially, the scheme offered a flat income tax rate of 30 percent in lieu of the regular progressive income tax with a top marginal tax rate of 68 percent. …The design of the scheme lends itself to a difference-in-differences approach in which we compare the evolution of the number of foreigners above the eligibility threshold (treatments) and below the eligibility threshold (controls). Such an analysis is presented in Figure 3. It shows the stock of foreigners between 1980–2005 in the treated earnings range and in two untreated earnings ranges, between 80–90 percent of the threshold and between 90–99 percent of the threshold. …The graph provides exceptionally compelling evidence of mobility responses.

Here’s a chart from the study showing a pronounced increase in migration from those (the red line) who could benefit from the lower tax rates.

The study also includes some evidence from the 1986 Tax Reform Act in the United States.

Can elasticities be sizable even for large countries that start with a large base of foreigners? Akcigit, Baslandze, and Stantcheva (2016) shed light on this question. They study the effects of top tax rates on the international mobility of “superstar” inventors—those with the most and best patents. …panel B considers the US Tax Reform Act of 1986 which sharply reduced the top marginal income tax rate. … the US Tax Reform Act of 1986 had a strong effect on the growth of foreign superstar inventors. In fact, the estimated mobility elasticity of top 1 percent superstar inventors for the US economy is extremely large, above 3.

Here’s the chart showing how lower tax rates in the United States helped to attract valuable inventors.

If you want more data, I wrote about the tax-driven mobility of super-entrepreneurs in 2015 and I wrote about the tax-driven mobility of super-inventors in 2016

There are two obvious lessons from all of the data and evidence in today’s column.

First, high tax rates are very costly because high-value taxpayers are far more likely to move. This means there are greater-than-ever penalties for bad policy and greater-than-ever rewards for good policy. Bad news for states like New Jersey and nations such as France. Good news for Florida and Switzerland.

Second, tax competition is a very valuable check on the greed of politicians (a.k.a., the “stationary bandits“). Simply stated, governments no longer have unconstrained ability to tax and spend. Which explains, of course, why international bureaucracies (acting at the behest of politicians) are working very hard to replace the liberalizing force of tax competition with some sort of global tax cartel.

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Greece Needs to Expand its Experiment with Supply-Side Economics

There’s a reason that Greece is almost synonymous with bad economic policy. The country has endured some terrible prime ministers, most recently Alexis Tsipras of the far-left Syriza Party.

Andreas Papandreou, however, wins the prize for doing the most damage. He dramatically expanded the burden of government spending in the 1980s (the opposite of what Reagan and Thatcher were doing that decade), thus setting the stage for Greece’s eventual fiscal collapse.

But Greek economic policy isn’t a total disaster.

Policy makers in Athens are trying a bit of supply-side tax policy, at least for a limited group of people.

The U.K.-based Times has a report on Greece’s campaign to lure foreigners with low tax rates.

“The logic is very simple: we want pensioners to relocate here,” Athina Kalyva, the Greek head of tax policy at the finance ministry, said. “We have a beautiful country, a very good climate, so why not?” “We hope that pensioners benefiting from this attractive rate will spend most of their time in Greece,” Ms Kalyva told the Observer. Ultimately, the aim is to expand the country’s tax base, she added. “That would mean investing a bit — renting or buying a home.” …The proposal goes further than other countries, however, with the flat tax rate in Greece to apply to other sources of revenue as well as pensions, according to the draft law. “The 7 per cent flat rate will apply to whatever income a person might have, be that rents or dividends as well as pensions,” said Alex Patelis, chief economic adviser to Kyriakos Mitsotakis, the prime minister. “As a reformist government, we have to try to tick all the boxes to boost the economy and change growth models.”

Here are excerpts from a Reuters report.

Greece will offer financial incentives to encourage wealthy individuals to move their tax residence to the country, part of a package of tax relief measures… Greece’s conservative government is keen to attract investments to boost the recovering economy’s growth prospects. …The so-called “non-dom” programme will offer qualified wealthy investors who opt to shift their tax residence to the country a flat tax of 100,000 euros ($110,710) on global incomes earned outside Greece annually. “The tax incentive will run for a duration of up to 15 years and will include the benefit of no inheritance tax for assets outside Greece,” a senior government official told Reuters. One of the requirements to qualify will be residing in Greece for at least 183 days per year and making an investment of at least 500,000 euros within three years. …Investments of 3 million euros will reduce the flat tax to just 25,000 euros. There will also be a grandfathering clause protecting investors from policy changes by future governments.

By the way, Greece isn’t simply offering a flat-rate tax to wealthy foreigners. It’s offering them a flat-amount tax.

In other words, because they simply pay a predetermined amount, their actual tax rate (at least for non-Greek income) shrinks as their income goes up.

And since tax rates matter, this policy is luring well-to-do foreigners to Greece.

That’s good news. I’m a big fan of cross-border tax migration, both inside countries and between countries. And I’ve specifically applauded “citizenship by investment” programs that offer favorable tax rates to foreigners who bring much-needed investment to countries wanting more growth.

But I want politicians to understand that if low tax rates are good for newcomers, those low rates also would be good for locals.

But here’s the bad news. Fiscal policy in Greece is terrible (ranked #158 for “size of government” out of 162 nations according to the latest edition of Economic Freedom of the World).

What’s especially depressing is that Greece’s score has actually declined ever since the fiscal crisis began about 10 years ago.

In other words, the country got in trouble because of too much government, and politicians responded by actually making fiscal policy worse (aided and abetted by the fiscal pyromaniacs at the IMF).

And the bottom line is that it’s impossible to have overall low tax rates with a bloated public sector – a lesson that applies in other nations, including the United States.

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