Sunday, February 14, 2010

WSJ: A new study shows that wealth flees after taxes rise.

The graph above comes from today's Wall Street Journal Escape from taxation

[A] just-released study reveals about the number of residents of the Garden State fleeing to greener pastures.

The study by Boston College's Center on Wealth and Philanthropy—"Migration of Wealth in New Jersey and the Impact on Wealth and Philanthropy"—looked at 1999 to 2008. It found that in the decade's first half New Jersey experienced a "substantial increase in both household wealth and charitable capacity," otherwise known as "expected giving." During those five years the Garden State had a $98 billion net influx of capital due to wealthy households moving into the state, and it enjoyed a corresponding $881 million increase in "charitable capacity."

The Garden State was blooming. Then the trend reversed. From 2004-2008, author John Havens found "a large decline in the number of wealthy households entering New Jersey" as well as "a moderate increase in the outflow of wealthy households leaving." The result: a net decline of $70 billion in household wealth while the "expected giving" became a net outflow of $1.132 billion.

So what happened in 2004? The study doesn't purport to explain what caused the wealth movements. But the state's most notable economic policy event that year was an increase in its top income tax rate to 8.97% from 6.37%, on incomes starting at $500,000. That's a 40% increase.

It's all about the elasticity. As I always say, "E is for escape and E is for elasticity." Many of the wealthy have lots of options for where to live, so they are highly elastic in making location choices.

From the point of view of wealthy taxpayers, there are many good substitutes for living in New Jersey, so a highly progressive income tax is going to have behavioral effects.

It's interesting to note that the apparent effect on inflows is stronger than the effect on outflows. That makes sense. People who have not yet made sunk cost investments in relocating to New Jersey will respond more strongly to the tax than those who are already there. A New Jersey physician with an established practice whose children are settled in schools where they are thriving is likely to be somewhat less elastic (at least in the short run) than a wealthy ex-pat returning from overseas and trying to decide where to put down roots.

The complete study is available here.

No comments:

Post a Comment