Drop in on an Econ 101 class and at some point in the term, you’re bound to hear the economics professor say, “If you want less of something, tax it.”
That’s one reason for “sin” taxes. The hope is that high enough tax on liquor, tobacco, or—more recently—marijuana, will reduce consumption of these sinful products.
Taking it a step further, one way to have fewer rich people would be tax higher incomes at a higher rate.
But there is a rip roaring debate in economics and policy circles about whether this basic rule of economics actually applies to income taxes.
On the one hand, there is a large body of evidence that differences income taxes are associated with the migration of individuals—especially high income individuals—from high tax areas to lower tax areas:
- Research using data from the Panel Study of Income Dynamics, find that both higher tax rates and increased tax rate progressivity decrease the probability that a head of household will move to a better job during the coming year, slowing the potential for household income growth.
- The existence of a state income tax influences migration patterns and that higher state income tax levels have resulted in reduced per capita income growth over time.
- Income taxes have an effect on migration for most races and age groups, and that individuals move from states with high income taxes to states with low income taxes.
- The Public Policy Institute of California (PDF) finds that Californians of all incomes leave California for states without income taxes. Among highest income households, 36 percent more leave than arrive in California.
- Approximately 1.5 million New Yorkers left the state between 2000 and 2008 due to “high costs and taxes,” and that those that left were selectively higher income households.
- Studies from other countries with variable, internal regional tax rates support the hypothesis that US state-to-state migration would also be affected by tax policy. For example, research finds that newly-educated individuals, in particular, migrate in response to tax differences. A one percentage point increase in the tax rate change effects a 2.8 percentage point increase in the net out migration rate.
On the other hand, Warren Buffett once claimed that he’s never worked with anyone who mentioned taxes as a reason to forgo an investment opportunity that he offered.
A working paper recently distributed by the National Bureau of Economic Research seems to support the traditional view.
The authors look at what they call “star scientists,” whom they define as scientists with a large number patents—in the top 5 percent of those with patents. Based on the patent applications, they identify the scientists’ state of residence in each year over a number of years. With that information, the researchers can see whether a scientist has moved, which state they moved from, and which state they moved to. Then they link that information with data on each states top tax rates for individuals and business and and statistically analyze if taxes played a role in the move from state to state.
The results are interesting and indicate that tax rates are factor in attracting and keeping top scientific talent:
- Star scientists’ moves from state to state are sensitive to changes in the top marginal tax rate on individuals.
- Corporate income taxes affect state-to-state moves among private sector “star scientists” with no statistically significant effect for moves by academic and government researchers.
Count this as another piece of evidence that, “If you want less of something, tax it.” And it even applies to top scientists.