Tuesday, April 28, 2009

Let my rich people go!

Ed Glaeser wonders if the new, higher marginal tax rates in New York State will lead to an exodus of the rich:
The problem with a tax on millionaires is that the economic success of a region is closely tied to its ability to attract highly skilled workers. The figure shows that a 10 percent increase in the share of a metropolitan area’s adult population with college degrees in 1980 is associated with a 7 percent increase in that area’s income between 1980 and 2000.

Any policy that makes a place less attractive for workers with high skill and education levels, including millionaire’s taxes, carries risks since localities that are dependent on skilled workers for long-run economic success. If all states simultaneously taxed the rich, then this would be essentially a national policy with little geographic consequences, but if some states raise taxes more than others, then economic activity will respond to those taxes.
All else being equal, people will seek to live in states with lower tax rates. Of course, all else is not equal. Many northeastern states have higher tax rates (New York, New Jersey, Massachusetts), but they also have other amenities that attract highly educated and productive workers. People are attracted to the culture, vibrancy and dynamism of cities like New York and Boston, and probably wouldn't choose Fort Lauderdale just because of the tax rate.

However, as Glaeser points out, if there are lower cost alternatives within commuting distance (such as Greenwich, Conn in the case of New York City), then high income workers may choose to relocate. Given the fact that the rich are more able to afford moving, this is a completely plausible story.

It's a tough spot for cash-strapped states, but they may face situations where raising tax rates will actually lower tax revenues (yes, in very rare cases, supply-side economics does work!). However, if there are no lower tax alternatives within communiting distance, then states might be able to tax the rich without creating an exodus. If Colorado raised its income taxes, high skilled workers in Denver or Boulder will probably not move to Wyoming just to take advantage of the tax break.

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