The Myth of Millionaire Tax Flight: How Place Still Matters for the Rich

By Cristobal Young

An investigation based on top earners’ IRS returns and other data: “A tour-de-force that should be read by policymakers and taxpayers everywhere.” —Douglas S. Massey, Princeton University
 
In this age of globalization, many countries and U.S. states are worried about the tax flight of the rich. As income inequality grows and U.S. states consider raising taxes on their wealthiest residents, there is a palpable concern that these high rollers will board their private jets and fly away, taking their wealth with them. Many assume that the importance of location to a person’s success is at an all-time low. 
 
Cristobal Young, however, makes the argument that location is very important to the world’s richest people. Frequently, he says, place has a great deal to do with how they make their millions. In The Myth of Millionaire Tax Flight, Young examines a trove of data on millionaires and billionaires—confidential tax returns, Forbes lists, and census records—and distills down surprising insights. While economic elites have the resources and capacity to flee high-tax places, their actual migration is surprisingly limited. For the rich, ongoing economic potential is tied to the place where they become successful—often where they are powerful insiders—and that success ultimately diminishes both the incentive and desire to migrate. 
 
This important book debunks a powerful idea that has driven fiscal policy for years, and in doing so it clears the way for a new era. Millionaire taxes, Young argues, could give states the funds to pay for infrastructure, education, and other social programs to attract a group of people who are much more mobile—the younger generation.
 
“An example of public sociology par excellence.” —Contemporary Sociology
 
“With grace, sophistication, and unprecedented data, this important book feeds public debates on inequality, public policy, and the health of American democracy.” —Martin Gilens, author of Affluence and Influence
 

• Language: English
• Publisher: Open Road Integrated Media
• Release date: Oct 31, 2017
• ISBN: 9781503603813

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Stanford University Press

Stanford, California

©2018 by the Board of Trustees of the Leland Stanford Junior University. All rights reserved.

No part of this book may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying and recording, or in any information storage or retrieval system without the prior written permission of Stanford University Press.

Printed in the United States of America on acid-free, archival-quality paper

Library of Congress Cataloging-in-Publication Data

Names: Young, Cristobal, author.

Title: The myth of millionaire tax flight : how place still matters for the rich / Cristobal Young.

Description: Stanford, California : Stanford University Press, 2018. | Series: Studies in social inequality | Includes bibliographical references and index.

Identifiers: LCCN 2017015547 (print) | LCCN 2017020482 (ebook) | ISBN 9781503603813 (e-book) | ISBN 9781503601147 (cloth : alk. paper) | ISBN 9781503603806 (pbk. : alk. paper)

Subjects: LCSH: Rich people—Taxation—United States. | Migration, Internal—United States. | Place attachment—United States. | Rich people—Taxation. | Tax havens. | Emigration and immigration. | Place attachment.

Classification: LCC HJ4653.R6 (ebook) | LCC HJ4653.R6 Y68 2017 (print) | DDC 336.20086/210973—dc23

LC record available at https://lccn.loc.gov/2017015547

Cover design: Preston Thomas, Cadence Design

Typeset by Bruce Lundquist in 10/15 Minion Pro

THE MYTH OF MILLIONAIRE TAX FLIGHT

How Place Still Matters for the Rich

CRISTOBAL YOUNG

STANFORD UNIVERSITY PRESS

STANFORD, CALIFORNIA

STUDIES IN SOCIAL INEQUALITY

This book series is devoted to examining poverty and inequality in its many forms, including the takeoff in economic inequality, increasing spatial segregation, and ongoing changes in gender, racial, and ethnic inequality.

Table of Contents

List of Figures

Acknowledgments

1. Millionaire Taxes in a World with Few Borders

2. Do the Rich Flee High Taxes?

3. Global Billionaires and International Tax Havens

4. Place as a Form of Capital

5. Millionaires and the Future of Taxation

Notes

References

Index

List of Figures

Figure 2.1. Millionaire Concentration and Top State Tax Rates, 1999 to 2011

Figure 2.2. Migration Rates by Income Level, 1999 to 2011

Figure 2.3. Border Counties of Washington and Oregon

Figure 2.4. Border Counties and Tax Differences in the United States

Figure 2.5. Forbes Billionaire Population Per Capita, by Top State Income Tax Rate, 2010

Figure 2.6. Millionaire Migration Rates, by Socioeconomic Group

Figure 2.7. Migration Rates by Age, for Different Levels of Education

Figure 3.1. Demographics of Global Migration, 2010

Figure 3.2. Retention of Billionaires by Country and Tax Rate, 2010

Figure 3.3. Retention of Billionaires by Country and Per Capita GDP, 2010

Figure 3.4. Use of Offshore Accounts

Figure 4.1. Foreign Population in Western Europe (EU15), 1995 to 2014

Acknowledgments

Writing a book is to live a life absorbed in writing. I have been fortunate to have exceptional companions and collaborators in this task. One of the central themes of the book is that no accomplishment is an individual act—everything we do is a joint product, and all our work is the result of team production. And every so often, we have the chance to reflect on, honor, and thank those who helped us achieve our best work. It is a pleasure to do so here.

I have been studying and writing about millionaire migration for many years. But I only began writing this book while teaching a third-year paper seminar at Stanford in the fall of 2015. This course made me responsible for twelve graduate students, and I pushed them hard to do their best in writing weekly memos and in developing the broader vision of their projects. I soon came to want the same demands and discipline placed on me and reached out for help. My wife Patricia became the patient but demanding reader of my own weekly memos. I also reached out to my colleagues Alice Goffman and Sarah Quinn, and together we formed a book-writing club that kept the deadlines real and the feedback insightful. So began a year of intensive writing.

The initial project of millionaire migration began in collaboration with Charles Varner back in 2008. Charles was my colleague in sociology at Princeton and is now executive director of the Stanford Center on Poverty and Inequality. We have done far more together than I ever could have accomplished alone. Charles is a true scientist and a relentless voice for diligence. We shared a vision of science and a conviction of purpose in our work. Our progress was slow sometimes—because we had a lot to learn, felt a deep responsibility to get it right, and endlessly triple-checked our results. It is hard to imagine having a better research partner in this project. Our years of working together deeply inform this book. I thank him for every bit of energy he has given to our work.

I am also indebted to Ithai Lurie and Rich Prisinzano at the U.S. Department of the Treasury, who curated my access to the IRS tax return data. The confidential tax returns of American citizens provide the core empirical foundation for this book, especially the 45 million tax returns of the richest U.S. citizens over more than a decade. Legally, I have no access to the raw tax return data, and I cannot even enter the building where these data are housed. These data are highly sensitive and deserve careful protections. Over several years, Ithai and Rich made these data available remotely in analytical results. I sent them statistical code, and they sent back statistical findings. This may sound like an easy process, but it required tremendous patience from everyone. A missing semicolon can render well-designed code useless and hard to debug. Statistical code sent by e-mail is hard to write, and hard to implement, with error sources that are hard to guess at. There were times when all of us wondered whether this collaboration was worth the painstaking effort it required. But it was, and I gratefully thank Ithai and Rich for the years they put into this project. I would gladly do it all over again for what has been learned and hope that the tax data will continue to be available to scholars with important questions to ask.

Maddy Young was my graduate research assistant while writing this book, and it was a privilege to have her energy and commitment to the project. She helped with the research and data collection but was soon promoted to book editor. Maddy has a piercing eye for clarity and detail, combined with a kindness of form, that made me eager to read her feedback and questions. I also had excellent research assistance from Katharina Roesler, Andrew Granato, and Erin Cumberworth. Their assistance has turned what could have been a long, hard slog into an exciting process of discovery. I thank each of them for their contributions.

Many people over the years have shared their thoughts, feedback, and input on this project, including Woody Powell, Bruce Carruthers, Mark Granovetter, Mitchell Stevens, Monica Prasad, Emmanuel Saez, Mike Hout, David Grusky, Jeff Manza, Shamus Khan, Paul Starr, David Pedulla, Marty Gilens, Eric Schwartz, Emily Erikson, Pablo Mitnik, Isaac Martin, Dan Lichter, Philip Morgan, Deirdre Bloome, Jerald Herting, Emilio Zagheni, Christof Brandtner, Jennifer Hill, Aaron Horvath, Sarah Thébaud, Mark Mizruchi, Filiz Garip, and Gabriel Rossman. At Stanford, I have enjoyed a community of scholars and supporters including Shelley Correll, Michelle Jackson, Tomás Jiménez, Michael Rosenfeld, Paolo Parigi, Aliya Saperstein, Amir Goldberg, and Corey Fields. I am grateful to all of you for your friendship and for the many small and kind ways you helped make both work and life better.

From Princeton University, where I first began this work, I want to thank the people who helped give me the strongest possible start, including Paul DiMaggio, Douglas Massey, Martin Ruef, Viviana Zelizer, Bruce Western, Scott Lynch, and Robert Wuthnow. I’m thankful for their support and encouragement and miss the many great conversations we had.

At Stanford University Press, I thank Paula England and Kate Wahl for their support and confidence in the book project. I also thank anonymous reviewers for their excellent feedback on both the initial proposal and the submitted manuscript.

Finally, my wife Patricia has been my companion in life, love, and scholarship for more than fifteen years. Few ideas are distilled in my mind without Patricia’s guidance and filter. Few parts of my life are meaningful without her presence. She is the center of my life, and my anchor. I dedicate this book to her.

1

Millionaire Taxes in a World with Few Borders

We live in a time of both globalization and growing inequality. This dual trend presents a troubling challenge. Places and nations can alleviate inequality, at least in part, by taxing the well-off and investing in education, infrastructure, and public services that make life better for most people. But globalization renders the rich more mobile and less connected to places that might tax them. The potential flight of the rich leaves places, states, and countries wondering about the future.

Many places and nations are concerned about the migration of top taxpayers. Taxes paid by the rich provide revenue for vital public services and help to address the growing inequality in market incomes. However, millionaire migration—the flight of the largest taxpayers—can drain state revenues and set off a race to the bottom as states try to woo the richest with ever-lower tax rates.

The discourse of globalization depicts a world where borders are frequently crossed. Rich, cosmopolitan elites and their capital flow easily across borders; people are less tied to place, less tied to the land, to their nation, and to their local communities. If this characterization is true, it is incredibly important. If a jet-setting millionaire class can easily dodge taxes by moving away, these people can effectively dictate tax policy to states and nations by threatening to leave.

In recent years, eight U.S. states have passed millionaire taxes—new income tax brackets with higher rates—on their highest income earners. Yet, some other U.S. states, like Texas and Florida, still have no state income tax at all. Can some states tax the rich while other states do not? Can higher tax states retain their wealthy residents and the tax revenue they bring in?

Many answer this question with a ferocious no. As Oregon residents went to the polls to vote on a proposed millionaire tax in 2010, Oregon’s richest resident—Nike founder and chairman Phil Knight—warned that the tax would set off a death spiral in which thousands of our most successful residents will leave the state.¹ In Maryland, Larry Hogan, a leading critic of the state’s short-lived millionaire tax, insisted in 2012 that people are simply going to leave, leading to a downward spiral of raising revenues on fewer citizens.² Hogan was subsequently elected as the Republican governor of Maryland. In New Jersey, Governor Chris Christie simply declared, Ladies and gentlemen, if you tax them, they will leave.³

These views are based on the strength of people’s convictions rather than actual evidence. Until very recently, there has been remarkably little data and analysis on the migration patterns of top income earners. Debates have been driven by anecdotes and instincts. This book is about filling in the vacuum of evidence—drawing on big data to provide compelling answers to a systematic set of questions about the mobility of the rich.

Top income earners—defined here as those making at least $1 million a year—are free to live anywhere in the United States. The very richest of them can likely live anywhere in the world. Indeed, for the rich today, the global map looks increasingly like the United States—a collection of places with no real borders between them, among which an economic elite can freely move and choose where to live.

With the diminishing cost of travel, increasing ease of obtaining international visas, and the rise of online communication, the viability of tax migration seems greater today than ever before. Some see the very richest as making up a transnational capitalist class⁴ that enjoys unrestricted freedom to move across the world through a network of global cities. Will this compel states and countries to compete over lowering tax rates on the rich? Will low-tax states and nations poach the highest income earners from higher tax places? This issue is closely related to questions of how globalization, more generally, is disciplining nations and creating pressure for an international race to the bottom in taxation and social policy.

Neoclassical economists have long seen taxes as a factor that influences where people choose to live.⁵ Economists, of course, also recognized that taxes pay for public goods—better roads, bridges, parks, and schools—that influence where people want to live. As long as revenues are used to fund public services that matter to residents, there is no reason to think taxes would lead to out-migration. However, in more recent years, some have argued that under highly progressive taxes, the rich contribute much more than they receive in public services. Harvard economist Martin Feldstein has made some of the strongest claims about tax migration among top earners. In a world of free mobility, Feldstein argues, taxes on the rich do not raise revenue or reduce inequality but simply lead to millionaire migration. If states raise taxes on the rich, the top income earners will leave, causing not just a loss of tax revenue but also a shortage of high-skill workers. The market will, in turn, bid up the wages of the remaining high-skill workers, and inequality in the state will return to its equilibrium level. Taxes on the rich, Feldstein argues, fail because of freedom of movement.⁶ This view has become increasingly prominent in public debates over taxes, especially at the state level.

There are, however, broader sociological reasons to doubt the ready mobility of millionaires. Moving is a young person’s game, but earning income in the top bracket is not. Migration overwhelmingly occurs when people are establishing their careers. People almost never move when they are at the advanced career stage—a time when they are most likely to face a millionaire tax. At the peaks of their careers, people have family responsibilities—spouses and children who may be opposed to moving. They also have a lot of business and social contacts that make them prominent, well-connected insiders where they live. Top income earners, in other words, have often accumulated significant human, social, and cultural capital where they live.

Economic sociologists have long emphasized that economic action, such as income earning, is embedded in concrete, ongoing systems of social relations.⁷ Income is partly based on personal connections to colleagues and clients, experience within a company, local reputation and goodwill, knowledge of one’s competitors, and access to social networks that bring rich information. Moving after achieving high success or at a late career stage can mean giving up a home-field advantage that may not make much business or economic sense.

.   .   .

In the age of globalization, what is the connection between the rich and the places where they live? Is place a temporary convenience for the rich and powerful—readily switched out when the tides change? Or is place a deep foundation for their success? Are top income earners mobile millionaires searching for low-tax places to