I recently sat down with Tom Cooke, a Professor in the Department of Geography at UConn, and we discussed general policy issues facing the state and the need for Connecticut focused research that could help guide policymakers. This conversation spawned from several that the Hartford Foundation for Public Giving has hosted in regards to the need for an independent non-partisan public policy center in the state.
One issue where there seems to be a steady drumbeat in the media concerns outmigration – millennials are one population as well as high income earners. However, the magnitude and impact on the economy are unknowns.
Tom shared a recent academic paper that examined the “millionaire migration” issue using national census panel data (not the U.S. Census but actual record level data of millionaires using IRS restricted data). This blog post summarizes the findings of the paper: “Millionaire Migration and Taxation of the Elite: Evidence from Administrative Data” by Young et al.
Below are several of the key findings from the paper:
- Millionaire migration is responsive to top income tax rates BUT the magnitude of the migration is small and has little effect on the millionaire tax base
- Evidence for tax flight is only found in migration to Florida and not to other low-tax states
- No evidence that millionaires cluster on low-tax side of state borders
- Millionaires are embedded in the regions where they achieve success and have limited interest in moving to procure tax advantages
The commonly held assumption in tax-induced migration models is that income is exogenous to location – meaning not caused by the location but rather caused by factors outside of the location.
Truth: Most millionaires are at their peak years of earnings and are drawing on long personal investments in a career they cannot easily migrate away from (Saez 2015; Varner and Young 2012). Income earning capacity derives not just from individual talent and human capital but also from place-based social capital – social and business connections to colleagues, collaborators, funders, and co-founders. Therefore, income is NOT exogenous but rather, endogenous to location.
What about the belief that “Elites migrate from high-tax to low-tax states?”
In their analysis, Young et al. discovered that:
Quite the contrary – Millionaires are not focused on finding low-cost places to live, but are attracted to expensive locations.
Millionaires are more sensitive to income tax rates than the general population
Florida is the leading destination for millionaire migration
When Florida is excluded – differences in tax rates between states have no effect on elite migration
Persistent millionaires (earnings for 8+ years) demonstrate tax avoidance as factor in migration, BUT they also have the lowest overall migration rates
Other interesting findings:
The highly educated are highly mobile more so than those with less education. This is true BUT migration mostly occurs early after graduation, when income is lowest, rather than late in one’s career when income is highest. Millionaires are unlikely to be unemployed and searching for work – a key factor that contributes to migration.
In any given year, approximately 500,000 households file returns reporting $1 million or more in income. Of those households, about 12,000 change their state in a given year. The chart below shows the rate of migration for households with different income levels.
Migration Rates by Household Type
What factors contribute to low migration rates among top earners?
Social and economic characteristics – marital status, dependent children, age 65 or older, and ownership of business
Marital status – single individuals have a migration rate almost twice that of married couples – 4.1 versus 2.2 percent
Almost all millionaires are married – 90 percent compared to 58 percent of the general population
Millionaires are more likely to have children – 50 percent compared to 40 percent
Although, millionaire tax flight is occurring, it is only occurring at the margins of statistical and socioeconomic significance. Since their share of migration flows represents a very small share of top income-earners, the patterns of migration have little impact on the millionaire population tax base even over the 13 years.
In fact, the authors estimated in order to experience a 1 percent loss of the millionaire population it would require a 10 percent increase in the top tax rate.
Come join us September 19th to discuss how to extend this research to be specific to the issues facing Connecticut’s population and economy.
Source Data: Includes all federal income tax filers with reported earnings of $1 million or more in any year between 1999 and 2011. Includes 45 million tax records, representing 13 years of panel data on 3.7 million unique tax filers. Incomes adjusted for inflation to constant 2005 dollars. Tax filers who ever report annual income of at least $1 million are included, and income and residency are tracked for the full 13 years regardless of annual income in any other year
Young, Cristobal; Varner, Charles; Lurie, Ithai Z., Prisinzano, Richard, “Millionaire Migration and Taxation of the Elite: Evidence from Administrative Data.” American Sociological Review 81(3) (2016): 421-446.