A new report from the Pioneer Institute is raising alarms about the proposed millionaire tax by questioning the research of an academic who has claimed that higher taxes on the rich do not prompt large numbers of them to move out of state.
The report, written by Pioneer’s research director, Greg Sullivan, takes to task Cristobal Young, an associate professor of sociology at Stanford University whose work on millionaire migration has become a staple in just about every debate and news article on the merits of taxing the wealthy.
Sullivan offers eight reasons to question Young’s conclusions, and Young responded after a query from CommonWealth with eight responses. A summary of the point-counterpoint is below, and links to the two reports are here (Sullivan) and here (Young). Subsequent to the initial publication of this story, Sullivan offered a rebuttal to Young’s reply.
Reason 1: Young overlooks a lot of millionaire migration because he focuses only taxpayers who file federal tax returns with incomes of $1 million or more from one state in one year and then file a federal tax return from a different state the following year.
SULLIVAN: The Pioneer researcher argues that many more people have net worths greater than $1 million, and as a result may respond to the imposition of a millionaire tax.
YOUNG: He acknowledges he doesn’t consider an individual’s net worth. “The reason for this is that I am studying taxes on top incomes. There is not a tax on net worth in the US, nor is one currently proposed in any US state,” he said.
Reason 2: IRS data show that taxpayers who earn more than $1 million in annual income do so infrequently.
SULLIVAN: “Young’s definitions overemphasize one-time millionaires – people who sell a home, a business, or another once-in-a-lifetime asset they have been counting on.”
YOUNG: “We published results for people who were one-time millionaires, as well as for people who earned million-dollar incomes for many years,” Young said. “We showed that highly persistent millionaires have lower migration rates – they are more tied to place than one-time millionaires. However, when they do move, they are more likely to make their destination a lower-tax state.”
Reason 3: Young’s approach misses taxpayers who aren’t earning $1 million in the current year but nevertheless move to a lower-tax state because they know they are about to take a million-dollar gain.
SULLIVAN: Nothing to add.
YOUNG: “The idea of moving to exercise large capital gains is a question I am currently studying with my colleague Charles Varner using California income tax data.”
Reason 4: Young pays to little heed to the Florida effect.
SULLIVAN: Florida has no income, capital gains, or estate taxes. Florida accounts for nearly half of Massachusetts’ out-migration of adjusted gross income at all income levels, yet Young minimizes the state’s attraction to millionaires by saying that if Florida is excluded there is virtually no tax migration. “This is akin to saying that if you exclude Muhammad Ali, Louisville hasn’t produced any great boxers,” Sullivan said.
YOUNG: “We did not exclude Florida. We simply point out that it is Florida that drives the entire result, and that all other no-income-tax states see no evidence of attracting millionaires. We are emphasizing that Florida is important, nothing more or less.” He also notes that Florida also has a climate that may be attractive to the wealthy.
Reason 5: States with no capital gains taxes have the highest capital gains reported on federal tax returns, suggesting the wealthy do move to where their money is shielded from state taxes.
SULLIVAN: The four states with no capital gains tax (Wyoming, Nevada, Florida, and Washington) had the highest average federal capital gains income.
YOUNG: “Few millionaires make their money from capital gains. Only 11 percent of millionaires primarily make their incomes (75 percent or more) from capital. Most millionaires are the working rich, employed, and earning salaries as managers, financial executives, accountants, lawyers, and doctors.”
Reason 6: Young fails to take account the effect of state-imposed estate taxes on millionaire migration.
SULLIVAN: “By not taking estate taxes into consideration, his conclusions overlook a powerful motivating factor in the tax planning decisions of high-income taxpayers.”
YOUNG: The proposed millionaire tax in Massachusetts does not tax estates, nor do any other other state millionaire taxes. “It is wrong to say I did not consider estate/inheritance taxes. I explored inheritance taxes at the state level, and found they had no effect on millionaire migration. Because readers have limited patience for null results, I left this to a footnote.”
Reason 7: Young includes major caveats with his conclusions.
SULLIVAN: One example is the difficulty in obtaining state income tax records. Another is the lack of data on the migration patterns of the rich. Sullivan also points out that “Young’s call for institution of a global tax on wealth to ameliorate capital flight appears to contradict his foundational conclusion that tax policy has barely any effect on tax-induced migration.”
YOUNG: He calls Sullivan’s criticisms “silly.” He says little was known about the migration patterns until his research was published. And he says it was Thomas Piketty who advocated for a global tax, not him. He quotes his own research: “States can make policy choices that contribute to the reduction of inequality without waiting for national or international agreements.”
Reason 8: Young disregards the cumulative effect of millionaire migration.
SULLIVAN: He says Young estimated that approximately 2.4 to 2.6 percent of taxpayers with annual incomes of $1 million or more will migrate to another state or nation each year. If the millionaire tax is adopted in Massachusetts, and just 2 percent out-migration occurs, Sullivan predicts that by 2035 the state will receive less in total income taxes and surcharge taxes from taxpayers with incomes of more than $1 million than if it had not been adopted.
YOUNG: He says 2.4 percent is the annual migration of millionaires across any state line in the United States; the percentage is not an estimate of tax-flight migration. “Based on my experience evaluating millionaire taxes in New Jersey, California, and across the US with IRS data, I predicted two migration results of the Massachusetts millionaire tax: (1) there will be many anecdotes of millionaires leaving the state; and (2) in aggregate, these flows will be too small to matter for the size of the millionaire population.”
CONCLUSION
SULLIVAN: The proposed millionaire tax adds a 4 percent income tax surcharge to wages, long-term capital gains, and the gain from the sale of a residence (after exclusion of $250,000 for a single filer and $500,000 for a married couple) that add up to more than $1 million. The tax would give Massachusetts the fifth highest top nominal income tax rate in the country and the sixth highest top marginal capital gains tax rate in the world. “Voters should think twice before effectively doubling the state taxes of high-income Massachusetts taxpayers and entrepreneurs.”
YOUNG: He said his new research is focusing on the long-term effects of top tax rates. He analyzed the population earning more than $200,000 per year in constant dollars from 1990 to 2016 in the states of New Jersey (with its progressive tax structure), Massachusetts (5.1 percent flat income tax), and Florida (no income tax). “If higher taxes seriously reduce a state’s population of top earners, there will be a strongly diminishing population of top earners in New Jersey, a modest decline in Massachusetts, and a growing top earner population in Florida.” The opposite is true. “In New Jersey, the top earner population rose sharply from 3.5 percent in 1990 to 8 percent in 2016. In Massachusetts, the rise of 200K earners was from 2.5 percent to 7.1 percent. In low-tax Florida, the rise was from 1.6 percent to 2.8 percent.” Young concludes: “Modest millionaire taxes at the state level are prudent ways to address growing income inequality in America, as well as providing revenues for public services and investments in people. These taxes come with little risk of millionaire tax flight.”