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California hiked taxes on the rich, they left, and revenues were only half those forecast

There is a large and growing body of evidence showing that taxes play a role in determining where people choose to live. A recent paper for the NBER titled ‘Taxation and Migration: Evidence and Policy Implications‘ by economists Henrik Kleven, Camille Landais, Mathilde Muñoz, and Stefanie Stantcheva reviewed “a growing empirical literature on the effects of personal taxation on the geographic mobility of people and discuss its policy implications.” They find that

There is growing evidence that taxes can affect the geographic location of people both within and across countries. This migration channel creates another efficiency cost of taxation that policy makers need to contend with when setting tax policy.

Another piece of research can be added to this body of evidence. A new paper by economists Joshua Rauh and Ryan J. Shyu titled ‘Behavioral Responses to State Income Taxation of High Earners: Evidence from California‘, again for the NBER, examines “the effects of personal income taxation on household location choice and pre-tax income”.

In 2012, Californians facing “temporary” multi-billion dollar budget deficits passed Proposition 30. This included a 3.45% sales tax increase as well as a $42 billion “temporary” increase in the state’s progressive income tax rates. Rauh and Shyu find that wealthy Californians were about 40% more likely to leave after the income tax hike, mostly to states without income taxes. They also found that these departures and other responses to increased taxes eliminated 45.2% of the revenue the state expected to get from high earners.

There is an important lesson for policymakers here. At present, there are a lot of spending promises being thrown around by various candidates for office with the promise that ‘the rich’ will pay for it all. They won’t. Senator Elizabeth Warren, for example, is currently proposing to fund ‘Medicare For All’ with a ‘Wealth tax’. But her plan assumes that this new tax will have no impact whatsoever on the behavior of ‘the rich’. This is an absurd assumption, as Rauh and Shyu’s paper highlights. The tax will not generate the revenue it is projected to, the revenue needed to fund ‘Medicare For All’. It will be the middle class who will have to step in and pick up the tab for Senator Warren’s irresponsible promises.

John Phelan is an economist at the Center of the American Experiment. 

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