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A Taxing Thought

This is NOT a Question About Taxes, Normative, Positive or Otherwise

A recent Washington Post article was discussing whether or not millionaires would move from one country to another because the taxes in the country increase. However, the author below concludes even if there are strong findings in Europe that rich people move in response to high tax rates, that such impacts cannot be generalized to the United States. Why? Because in places like England and France, the top income tax rates are/were much higher than the top rates being proposed in the U.S. Here is the quote:

“What’s more, it’s not clear that any effects the British law had would be relevant for the U.S. tax discussion. Even if the top income tax rate went back up to 39.6 percent, that would still be lower than that of most European countries, which would leave potential tax exiles fewer places to flee. Countries with unusually high rates, by contrast, have more to worry about.”

 But a simple application of the basic economic way of thinking, demonstrates rather clearly why this observation is flat wrong.

 Think at the margin!

Right now, in equilibrium, millionaires in America are not fleeing to Europe, and perhaps vice versa. Some people who really value living in Europe despite the taxes have made the move while others who like Europe but like money more, choose to stay here. But this is an equilibrium given that the top US tax rate is 35% and, say, in France which has raised it to 75%.

The problem is not that higher taxes in Europe discourage people from fleeing. The problem is that increases in top tax rates in the US reduce the gap between tax rates in Europe and tax rates in the United States. Regardless of the LEVEL of tax rates in each country, the MARGINAL COST of moving to Europe falls when we raise taxes in lower tax countries. Whether your country has unusually low tax rates or unusually high tax rates does not matter. In equilibrium, knowing what we know about the “indifference principle” people are equally happy at the margin living anywhere. So any increase in cost in one location relative to another is going to push on incentives, contrary to what the author above claims.

4 Responses to “A Taxing Thought”

  1. Trapper_John says:

    A few points here. First, flight is a two-way phenomenon. The article fails to account for immigration of millionaires, which is discouraged at the margin just as emigration is encouraged at the margin. This is not without cost, it’s just unseen.

    Second, the empirical evidence for increase in revenues seems compelling in the short run, but the long-term effects are a bit more cloudy (these effects are likely to take time). Plus, a millionaire fleeing takes not only his tax revenue, but his spending, which is taxed directly in terms of sales tax and income taxes on businesses he patronizes.

    Third, increasing taxes promotes tax avoidance activities at the margin, and these are not limited to flight. At the high level of wealth we’re talking about, portfolios are engineered to promote tax efficiency (see: Romney, Mitt). How do the implications for altered portfolios impact our economy? I’m curious as to the magnitude of these effects.

    • Harry says:

      Good points, Trapper John.

      My concern is that our government is doing whatever it can to kill economic growth, and that is succeeding. They want us to fail, to vindicate their morals, which are antithetical to American freedom and everything it implies.

    • Wintercow20 says:

      Good point, I should also have included a little data on relative immigration flows now.

  2. jb says:

    great posts WC, trapper john and harry. It’s the kind of fundamental observation (aren’t those always the best?) that I can throw at my “progressive” friends and watch them as they either squirm or actually begin to see the light. Can’t wait to try it out. I’ll point it out during lunch at work maybe, that by increasing top rates or so, we will certainly lose a number of wealthy Americans who will move to Europe, and a number of wealthy europeans who would have emigrated here, but now will not.

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