Millionaire tax flight study full of hasty generalizations

Oct. 30, 2012

By Wayne Lusvardi

When hosting TV game show “Family Feud,” the late host Richard Dawson made famous his line: “Survey says!”

There’s a new study out on how millionaires react to tax increases. What does the survey say?

“Millionaire Migration in California: The Impact of Top Tax Rates” is by Charles Varner and Cristobal Young, both of the Stanford University Center on Poverty and Inequality.

The study says:

* The flight of millionaires from California due to higher income tax rates from pending Proposition 30 is likely to be minuscule.  Only a maximum of 120 millionaires a year could leave or 1,200 over ten years. (Proposition 30 would raise the state income tax on those making $250,000 or more a year, with the top rate rising 3 percentage points, to 13.3 percent.)

* The highest income Californians were less likely to leave the state when the Mental Health Services Tax was passed in 2005.

* The number of non-resident millionaires who pay some taxes in California did not rise when the Mental Health tax was imposed.

* The 1996 state tax cuts did not have a consistent and substantial effect on retaining residents in California or attracting in-migrants from other states.

* The strongest out-migration factor was marital divorce.  Tax policies are “modest when compared to the life impact of marital dissolution.”

* Most millionaires fall into the highest tax bracket because of a peak year of earnings, such as real estate brokers, during the Mortgage Bubble.  So millionaires are not as likely to move if Prop. 30 passes, and their top income tax rate toes from 10.3 percent to 13.3 percent on a peak year of earnings.

Left out

Briefly, here is what the study didn’t say, or didn’t interpret properly:

* The largest out-migrations of Californians of all income levels have occurred during real estate booms such as the Mortgage Bubble, not during economic recessions. The largest net out-migration of California millionaires was in 2004, during the Mortgage Bubble, with 63 leaving (Stanford study, Page 22, Table 3.1).

* In-migration of millionaires from other states offsets the number of California millionaire out-migrations in most years. The larger problem is that the number of millionaires in California has declined by 61,410 since 2002. If this trend continues to 2019, when Prop. 30 expires, any tax increase on millionaires would be on 71,645 fewer millionaires than in 2012

* The percentage of those with incomes from $500,000 to $1 million that migrated out of California during the Mortgage Bubble from 2005 to 2007 rose 74 percent on average compared to the recessionary years of 2001 to 2004.

Year	Gross Number California Out-Migrants ($500,000 to $1 million earnings/year)Average Percent Change: +74%
2007	1,228
2006	1,269
2005	1,285
2004	857
2003	665
2002	600
2001	774
Source: Millionaire Migration in California, page 22, Table 3.1

Divorce

* There were 150,180 divorces in California in 2003-04.  In that same year, only 857 millionaires and 63 net millionaires moved out of California. The gross number of millionaire out-migrants (0.5 percent) and the net number of out-migrants (0.4 percent) are too small to be of statistical significance to generalize that divorce is the main cause of millionaire tax flight.  Most statisticians warn that such small numbers can lead to hasty generalization.

* Divorce rates for the middle class tend to fall during recessions and rise during booms, albeit the data are mixed.  Divorce rates dropped during the Great Depression of the 1930s.  Divorce does not appear to be the main driver of relocation out of state unless it is related to home foreclosure, mainly for those in lower income brackets.  The Stanford study confuses a symptom for a cause and tends to reduce the reasons for out-migration to psychological marital incompatibility. Divorce is not the main driver for people to move to California, nor to move out.

* The imposition of the state Mental Health Tax during the Mortgage Bubble is not a valid indicator for tax flight during a prolonged managed depression.

* To conduct a valid scientific study about millionaire tax flight, a comparison needs to be made between millionaires who left the state and those that did not. Instead, the Stanford study made a comparison of a so-called “Control Group” of those in the $500,000 to $1,000,000 income bracket with a “Treatment Group” in the $1,000,001 to $1 billion income bracket.  This is obviously not a valid apples-to-apples comparison (see Table 3.3).

* Low tax rates and business regulations appear to have a significant bearing on choice of state to relocate to.  All the “sender states” with the largest number of in-migrants to California have unfavorable tax and business climates; and all the “destination states” have better tax and business rankings by a factor of two (2 X).  Even if size of state is considered, there is a much greater tendency for out-migrants to flee to low tax-low regulation states.

* If divorce were a large factor in out-migration, then we would expect out-migrants to tend to move back to old family and community ties in their states of origin rather than to low tax states.  But that is not the case.  Moreover, the researchers ignored what is called “strategic divorce,” or “postnuptial agreements” where wealthy couples divorce to protect assets when there is financial stress.

Out-migration

* A Mercatus Center 2011 study found that higher state income-tax rates cause a net out-migration of both higher income residents and all residents.

* Of course, all this controversy dodges the question: Will future millionaires avoid residing in California?

In conclusion regarding wealth redistribution by taxing the wealthy, as Nobel Laureate economist Milton Friedman wrote:

 “There is all the difference in the world, however, between two kinds of assistance through government that seem superficially similar: First, 90 percent of us agreeing to impose taxes on ourselves in order to help the bottom 10 percent, and second, 80 percent voting to impose taxes on the top 10 percent to help the bottom 10 percent.

“The first may be wise or unwise, an effective or ineffective way to help the disadvantaged — but it is consistent with belief in both equality of opportunity and liberty. The second seeks equality of outcome and is entirely antithetical to liberty.”