New research finds that people move in response to taxes

I’ve written many times before about how people respond to incentives. If you tax cigarettes, you expect people to smoke less. That is why politicians tax cigarettes, or so they say. If you tax the income people earn from working or investing, you can, by the same logic, expect people to work or invest less.

Or they might just work and invest less in that tax jurisdiction. In the United States, where there are fifty tax jurisdictions with few barriers to movement between them, one way people can respond to incentives such as taxation is to move. A recent paper for the National Bureau of Economic Research titled ‘Taxation and Migration: Evidence and Policy Implications‘ by economists Henrik Kleven, Camille Landais, Mathilde Muñoz, and Stefanie Stantcheva, “review 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.

This echoes the findings of our report ‘Minnesotans on the Move to Lower Tax States 2016‘. Between 1992 and 2014, Minnesota lost a cumulative net total of $7.6 billion in household income to other states; with few exceptions, we are losing taxpaying families to lower-tax states; most of the taxpayers who leave Minnesota for lower-tax states are in their prime earning years; our state loses high-earning families at a much higher rate than other states; and the exodus of Minnesotans accelerated after the legislature’s 2013 tax increases.

The authors note caveats. First, their data “pertain to specific groups of people and to specific countries”. Second, “the mobility response to taxes…depends critically on the size of the tax jurisdiction, the extent of international or sub-national tax coordination, and the prevalence of other forces that foster or limit the movement of people, all of which can also be affected by policies”.

Neither of these, though, presents much reason to doubt the main finding. In the first case, the ability of people to move in response to taxes will vary, even where barriers are low, as in the US. And, where tax systems are progressive, the loss of more mobile, higher earning workers, presents a problem for government finance. In the second case, while it is possible that, say, greater harmonization of taxes across countries or states could reduce this mobility response, how likely are such policies to materialize? Not likely enough to think that we can buck the evidence.

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