Do high taxes cause wealthy people to leave a state or a country?

James B. Stewart, a reporter and author wrote on Op-Ed piece in the Saturday, February 16, 2013, issue of The New York Times, entitled “The Myth of the Rich Who Flee From Taxes.”  His major argument is summarized in the following statement:

“At least three recent academic studies have demonstrated that the number of people who move for tax reasons is negligible, even among the wealthy.”

As a person who knows many wealthy people who have moved to states with no income or inheritance taxes, and many who have chosen not to do so, I am often asked by many people why we do not leave Connecticut and establish a primary residence in a state like Florida, where I could save millions of dollars in taxes over the rest of my life.  My view is that Stewart is only partially correct and partially wrong in his assertion that higher taxes do not drive people to change where they live.

The first key determinant of whether high taxes causes wealthy people to flee a jurisdiction is the distance between the high tax and low tax areas.  People have moved from New York to Connecticut, or from Massachusetts to New Hampshire, or Maryland to Virginia for a long time because these states are in close proximity to each other, and Connecticut, Massachusetts, and Virginia are lower-tax states than the states next to them. Moves to a nearby state that do not require an individual or family to find new service providers can, and will, be made to improve someone’s tax position.

Where Stewart is partially correct

Moving from Connecticut to Florida or completely outside the United States is a far bigger and more complex decision, because someone would have to recreate all of the high quality services he or she receives in the high tax area.  As an older adult, one consideration that factors into every decision for me is the quality of healthcare.  My parents lived in the Daytona Beach, Florida area after retirement, and the quality of healthcare there was much more uneven, not because of the quality of the doctors, but because of the imbalance between supply and demand.  I would only move to another locality if the quality and availability of healthcare were equal to, or better than, what I can get here. Closely related to healthcare quality is the availability of nursing home and long term care facilities, and other services for the very old population.  My parents found out that the part of Florida in which they lived was great for people who were 60 and 70 years old, but was not as easy to navigate for the 80 and 90 year olds.

Beyond healthcare, there are many other considerations.  We have superb housekeeping and executive assistant help here, which took us a long time to find and nurture.  That kind of talent is not easily found when first moving to a new community.  Similarly, finding construction, maintenance, yard, weaving and tailoring, and other trades people is not a simple task.

The location of family and friends is also a critical decision point.  People want to have a critical mass of others they know in a community before locating there.  Tax savings are a great inducement for people, but the value of connections and relationships are of even more value financially.

For all these reasons, Stewart is partially correct.

Where Stewart is wrong

Many very wealthy people already maintain many residences, and have full support systems and groups of friends in each community.  It is not difficult for them to reorganize their time and activity to change residences from one of their jurisdictions to another.  People who are already “snowbirds” and split their time between New York and Florida can easily become Florida residents.

However, the bigger issue for wealthy people is that they will pay close attention to what high taxes are doing to their property value and their quality of life. High taxes do not correspond with high quality government services.  In many cases, they derive from an American form of what is called “crony capitalism.”  This is a form of capitalism seen in many underdeveloped countries, in which governments over-regulate the lives of people and provide uneven services.  Those who get better services are individuals who make campaign contributions or in some other way provide favors to elected officials and regulators.

Many states, and, to an increasing extent, the federal government, practice “crony capitalism” today.  When President Obama talks about redistributing money from the rich to the middle class or the poor, my view is that what usually happens with high taxes is that they take money from many productive rich people and redistribute it to a smaller class of rich or upper middle class people who support the party in power.  Moreover, there are unionized government employees, as well as the elected officials, who take a “toll charge” on that redistribution process.

When “crony capitalism” becomes sufficiently pervasive, wealthy people leave a community because it affects their quality of life.  Connecticut’s traffic congestion is a direct result of the pervasive and pernicious effect of the “crony capitalism” practiced by Governor John Rowland and the labor unions whose loyalty he secured with an outrageous 20-year collective bargaining agreement that has four more years to run.  Every time I see a malfunctioning rail car, an overcrowded parking garage at the Stamford Transportation Center, an excessively congested highway, I am reminded of the way Governor Rowland used the state as a private preserve for his cronies.  Although he did not get wealthy in doing so, and his crimes were relatively petty, the damage he did was enormous and far outlasted his tenure in office.

The quality of life in a community depends on the combination of state and local services.  In Connecticut, most governmental services are delivered locally, which keeps many wealthy people from leaving.  The schools, public safety, building and zoning decisions, and the acquisition of many licenses is done locally.  That means that well-run cities like Greenwich, New Canaan, and Darien give their residents a very different experience with government services than poorer cities like Bridgeport and Hartford.  Although Bridgeport now has a very good mayor, Bill Finch, it was one of the corrupt cities in America for decades, and saw three straight mayors go to jail.

Beyond the hostile environment for business and wealth creation, Connecticut has found a way to disenfranchise wealthy people by banning political contributions from anyone who individually or, as an executive officer, does business with the state.  This prevents a sizable number of business executives from helping candidates more favorable to their views get elected.  It gives a huge advantage to labor unions, which are exempted from this law.

The factor that is most likely to drive people from a high tax area to a lower tax area is the feeling of being disenfranchised in affecting a governmental system that is getting progressively more corrupt.  This is not an economic issue, as much as it is an empowerment and quality of life issue.

Stewart simply does not understand the psychological effect of a “millionaire’s tax” or a wealth tax or a high marginal tax rate that is used to redistribute wealth and power to cronies of elected officials, especially if it is experienced at all levels of government.  That is the real story, not whether somebody can save a few million dollars on taxes.

I have always taken the position that government taxes and fees can be higher or lower, but that the key issue for citizens is whether they feel they are getting value for what they are paying.  Arrogant and poor quality government service, poorly functioning infrastructure, like badly maintained highways or railcars, will drive out citizens, even in a lower tax jurisdiction. Articles like Stewart’s ultimately miss the point.

 

2 Responses to “Do high taxes cause wealthy people to leave a state or a country?”

  1. Dear Mike,
    Your wife’s cousin gave my wife a link to this blog, so I decided to check it out. Very interesting stuff.

    On this subject of the effects of high tax rates on the decisions of wealthy and high-earning people, I have collected a lot of historical data that you may be interested in. The debate over whether people will “leave” en masse is a distraction; not that many do, but over time the much bigger effect comes from talented young people deciding to start their careers and businesses elsewhere. I have characterized the effect of uncompetitive taxes as “gradual relative decline.” Remember 1974/5 when we graduated from law school? New York’s combined state/city tax rates were 19+%; NJ and CT had no income taxes at all at the time. NY businesses were not growing, and its law firms were hiring at low levels. In our HLS classes, only about 80 people per year went to NY. Today in a more competitive tax environment it is about 150. It was those kinds of decisions by many many people that led NYC to lose over 800,000 of population between the 1970 and 1980 census. Here are links to a few posts I have made on this subject:

    http://manhattancontrarian.com/blog/2013/4/15/the-consequences-of-bad-economic-policy-gradual-relative-decline

    http://manhattancontrarian.com/blog/2012/11/28/how-to-forget-the-lessons-of-history

    http://manhattancontrarian.com/blog/2012/11/7/california-speeds-up-its-drain-circling

    Cheers!

  2. Thanks for the thoughtful, in depth comment.

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