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Tuesday, May 26, 2009

Millionaires Go Missing

This is worthwhile reading from the WSJ. The article provides a current example of what happens when you ignore basic economic theory. Maryland raised taxes on the highest income earners, budgeted around the projected income, and lo and behold the "Millionaires [are] missing." This isn't really surprising. People lose incentive to earn if the incentive is lessened. And when the highest income earners are asked to bankroll everyone else, they just might pack their bags.

I point this article out because the examples provided therein I believe are extremely relevant to Orthonomic issues discussed right here on a regular basis.

19 comments:

Ezzie said...

I talked about this in NY - Bloomberg ripped into the State for trying to raise taxes on the rich, noting that if just 4% (?) of them leave they'll have lost any purported gains - and moving to CT is not exactly that difficult.

ProfK said...

It's ignoring basic economic theory and having no common sense. Americans are free to get up and move anywhere they want to in the US. Those in the top level of earning in the country more than have the means to relocate, and many have been doing so, particularly to the states with no state income tax.

The US Census Bureau reports that for 2007 and 2008, the seven states with no income tax in any form--Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming--led the nation in net population growth. The growth is expected to continue. Nevada and Texas report that the population growth figures show that more of those entering the states come from the higher spectrum of earning rather than from the lower spectrum.

Interesting to note that the population of NYC has not only remained steady but has gone up a bit. However the net gain in population has not been in the highest earning level but in the lowest. The population has grown but so has the demand for state/city services for the poor.

Commenter Abbi said...

How do the states without any income tax provide state/city services? I get Nevada (I'm sure there's some gambling commission revenue going on) and I think Alaska has the oil revenue, but what about the others?

I'd like to point out also that Flordia and Nevada were two of the worst housing bubble offenders.

Dave said...

Property and sales taxes, as a general rule.

Anonymous said...

Ummm, I wonder if it's possible that peoples incomes declined in 2008 dropping them out of the million dollar earner status? I know that my tax return had a -3000 in the capital gains line, and I bet a lot of those $1M+ earners used to have a bunch of capital gains that they didn't have in 2008.

profK - Americans are free to get up and move anywhere they want to in the US.[]

That's why we have to raise taxes at the Federal level and sort of "equalize" the states via various subsidies. I am paraphrasing the liberal-tax-the-rich folks here, it's not what I believe, but it is surely what they believe. Some far left folks even believe that worldwide tax rates should be equalized.

profK - Those in the top level of earning in the country more than have the means to relocate, and many have been doing so, particularly to the states with no state income tax.[]

For some reason, history doesn't quite show this. The top earners (I mean tippy top) choose to live in places like NY, CA, NJ, CT, MA, all states with the very highest of income tax rates. Maybe they are slowly moving out, but every survey shows that those places have so many of the top earners.

Abbi - I'd like to point out also that Flordia and Nevada were two of the worst housing bubble offenders.[]

And so was CA, which has the highest income tax rate of all. No correlation necessarily.

Mark

ProfK said...

The housing bubble in Nevada was driven more by those who were from out of state and bought up houses hoping to make a killing--they assumed wrongly that inflated prices were going to inflate even further. (And inflated is relative. The house mentioned below was "only" being offered at $537K in January and sold for $498K.)

Nevada has quite a bit of income from gambling revenues and from tourism. Also sales tax, which is still lower than in NY (and a lot of that sales tax is being paid by the tourists and those who come for the business conventions). Real estate taxes are there but can't account for a high proportion--we looked at a 12K square foot property with a 4300 sq. foot house on it in a fairly ritzy suburb and the real estate taxes were only $2973 a year this past January.

Mark, you don't need the tippy top to leave, just those nearby or in the top 5-10%. If someone earning $250K or $500K leaves and is replaced by someone going on welfare, well you do the math.

Anonymous said...

ProfK - Mark, you don't need the tippy top to leave, just those nearby or in the top 5-10%. If someone earning $250K or $500K leaves and is replaced by someone going on welfare, well you do the math.[]

This is true. But I've seen no statistics about it. This article that we are discussing specifically mentions incomes of $1M and up. To me, that's the tippy top :-)

Mark

Commenter Abbi said...

Mark, you make a good point about millionaires not decamping from Greenwich or NYC anytime soon. I wasn't necessarily saying there was necessarily a correlation between no income tax and the housing bubbles in Nevada and Florida, but I think in the case of Florida in particular, it didn't help.

When a state is missing a significant source of income, it probably won't do much to stop a housing bubble. (ie: reign in outrageous lending practices, enforce zoning, development laws, etc.)

Charlie Hall said...

Trying to compete as the low cost provider is not a recipe for success. Someone will come along and undercut you.

BTW, Alaska actually has some of the highest taxes in the US: Severance taxes on oil. But they are mostly paid by those of us in the lower 48 in the form of higher costs for oil and gasoline. Clever, that -- taxing those who don't vote.

Finally, it is worth noting that the real agenda behing the WSJ article is to kill off progressive taxes. Well, in most of NY, that has already happened, as outrageously high property taxes are a far greater burden than state income and sales taxes. It isn't pretty when one has to come up with $20K/year just for the taxes on a normal suburban home. But that is ok with the WSJ folks.

Anonymous said...

...and this is why it doesnt pay to make big bucks in the frum world. if i do, i have to fork it over in tuition. if i am in kollel, i dont.
i dont know how conscious a decision this is, but i imagine it is a factor in the decision not to become a big wage earner.

conservative scifi said...

ProfK,

As a proud Marylander, I doubt the validity of the WSJ article as well as your reasoning.

First, I suspect that the WSJ article fails to recognize that the recession has significantly reduced people's income, particularly business owners who make up the bulk of Maryland's millionaires in income. Given the 1/3 drop in stock assets and reduced business, rich people could have moved into Maryland, but the economic situation would result in fewer Maryland millionaires.

Second, people don't typically choose to live in an area solely based on taxes. In my experience, most people also look at the available amenities. Sure, someone can move from Montgomery county, Maryland to Montgomery county, Texas to save on taxes (and probably reduce housing costs), but they will give up a lot in services. For example, in the Newsweek rankings, Montgomery County Maryland had 23 high schools in the top 1,000, and 7 in the top 100 in the country. Montgomery county Texas had none that I could find. Even millionaires might want to be able to hire better educated workers from these better schools.

Basically, you get what you pay for. If you want to live in a rural area with no amenities, but low expenses, that may be a wonderful life. But it is a choice, just as most wealthy people apparently choose to live in higher tax areas. Presumably they could all move to Alaska, Texas or Florida, but for some reason, they don't.

Dave in DC said...

This is classic WSJ Opinion behavior, using incomplete and inconclusive facts to back their predeterined hypothesis. It could indeed be that some high earners moved out, but the idea that anywhere near 1/3 abandoned ship in a single year is preposterous. It's much more likely the data will show that bonuses, commissions, options, capital gains, and even salaries have all declined drastically in the worst recession in recent memory.

Miami Al said...

Well, it depends... a big chunk is going to be loss in income/capital gains, as they could all "realize" losses in the collapse, even if they overall are okay... (sell Exxon Mobile, buy Chevron to avoid wash rule, and 30 days later switch back if you want), which will mean instead of capital gains, a $3000 loss against income, plus plenty of carry forward losses... Obama may raise the capital gains rate, but on the already wealthy, they have plenty of losses from 2008 to carry forward, it's the aspiring wealthy that will pay it.

However, consider a high earning family with substantial assets that lives in Maryland and has a vacation home in Florida. Assuming some ability to work remotely/in the Miami office, the higher taxes on an already feeling crushed family may lead to a "drastic" step (drastic as in moving the children's school)... pick the family up, move them to the vacation home, and switch from 9 Months Maryland/3 Months Florida to 9 Months Florida/3 Months Maryland... at some point the tax situation makes it worth considering.

We get plenty of "well to do" New Yorkers and others that show up in Florida... sell the NYC Suburban home and buy and equivalent in Florida... it's not the 4:1 ratio it was pre-boom (but getting closer), but it's no longer the mere 2:1 ratio it was during the boom... They go from a large monthly mortgage payment to zero mortgage payment, and have some cash from the sale to cover them while they rebuild... the taxes don't explain the entire situation, but they explain some.

In Florida, we've always gotten more "well to do" migrants from up north than the poor, because the lower cost of living is more substantial on the wealthy, and the loss of government services affects the poor more... mediocre schools don't affect those using private school, but provides an incentive for the working poor to stay up north.

Our upper middle class have always been heavy users of private school down here, because the schools are terrible and with the low tax burden, most could afford it.

Anonymous said...

Charlie Hall - BTW, Alaska actually has some of the highest taxes in the US: Severance taxes on oil. But they are mostly paid by those of us in the lower 48 in the form of higher costs for oil and gasoline. Clever, that -- taxing those who don't vote.[]

And California imposes taxes on the production of avocados that are shipped to the adjacent 47. That results in higher costs for avocados.

Finally, it is worth noting that the real agenda being the WSJ article is to kill off progressive taxes.[]

There are some who believe that a flatter tax system is better overall. And there is nothing wrong with advocating such.

Well, in most of NY, that has already happened,[]

This is completely incorrect since NY taxes are very progressive at the most common income levels.

as outrageously high property taxes are a far greater burden than state income and sales taxes.[]

Property taxes are almost directly proportional to property value, which also roughly follows income.

It isn't pretty when one has to come up with $20K/year just for the taxes on a normal suburban home.[]

$20k/yr taxes would apply to the very upper levels of wealth and income. A household with average income (+/-25%, i.e. middle class) would obviously not be able to afford a home with $20k annual taxes!!!

But that is ok with the WSJ folks.[]

I don't think they commented on high property taxes, but I think we can safely assume that they would likely consider them to be too high as well.

Do you realize that your comments point directly to government overspending?

Mark

Anonymous said...

Miami Al - In Florida, we've always gotten more "well to do" migrants from up north than the poor,[]

I don't believe this to be true at all. We do get a good share of well-to-do folks moving down from up north (and they are well-to-do because of various reasons, not least of which is a higher average age), but we also get a large share of dirt poor looking for a warmer place to live (often outdoors), and we get a huge share of poor migrating from the south (though not nearly as large as some of the southwestern states).

Our upper middle class have always been heavy users of private school down here, because the schools are terrible and with the low tax burden, most could afford it.[]

I suppose "afford it" is subjective, and so is "upper middle class". But I agree that the typical upper middle class (UMC) family with 1 or 2 kids can afford, and does afford, private schools.

However, here on this blog, the typical UMC family has 4, 5, or even more kids and cannot easily afford private schools for all of them. Now add to that the fact that Jewish day schools have higher tuition than other parochial schools (though comparable to prep schools).

Finally, not all the schools are terrible. Some are pretty good, especially in areas of upper middle class type of housing. People often make the mistake of looking solely at averages, and since Florida is a huge state, and comprises many rural communities with low education standards, the Florida average is quite low (similar to Texas, CA, and other very large states).

Mark

Ezzie said...

Click.

Mark, ProfK, et al:

"more than 1,100 people every day including Sundays and holidays moved from the nine highest income-tax states such as California, New Jersey, New York and Ohio and relocated mostly to the nine tax-haven states with no income tax, including Florida, Nevada, New Hampshire and Texas. We also found that over these same years the no-income tax states created 89% more jobs and had 32% faster personal income growth than their high-tax counterparts.

Did the greater prosperity in low-tax states happen by chance? Is it coincidence that the two highest tax-rate states in the nation, California and New York, have the biggest fiscal holes to repair? No. Dozens of academic studies -- old and new -- have found clear and irrefutable statistical evidence that high state and local taxes repel jobs and businesses."

Maybe that's a 1/3, maybe not, but that's a HUGE amount of people, and most of them are probably in the top half in income. Poorer people are more likely to stick to big government-subsidy states, and less likely to be able to afford the move.

Again, in NY, Bloomberg said a 4% exit rate would cost the city more than the tax gain. I don't think that's unlikely at all.

Dave said...

That is 401,500 people, in the course of one year.

The population of the four states listed is around 76.5 million (and we still have five states excluded). That means we are talking about less than one half of one percent of the population.

And of course, the assumption that "most of them are probably in the top half in income" isn't founded in anything but supposition.

As it happens, roughly 4.7 million Americans moved to a different state last year, so even if we decided that every single one of those moves from a high-income-tax to a low-income-tax state was because of tax rates, it is still a fraction of the rate at which Americans moved between states (and last year was down significantly).

Reference: http://www.reporternews.com/news/2009/apr/26/percentage-of-americans-who-move-declines/

Mike S. said...

I tend to agree that moving to avoid taxes is relatively rare; however, one major exception to this is retirees. Look at the orthodox Jewish community of Las Vegas; it is very heavily composed of retirees fleeing income taxes.

However, progressive income taxes do have the problem that, to the extent they really try to raise a disproportionate share from the wealthy, the state becomes dependent on taxes on capital gains. These are quite variable; indeed, they turn to losses in bad times, which further reduces tax revenue. The two major factors squeezing state budgets are declining taxes on capital gains and an unwillingness to control the growth in health care costs.
Indeed, while Bush's tax cuts are often blamed for ending the Clinton era surplus (and they did contribute some) the major factor was that the principal source of surplus revenue was capital gains taxes on dot com bubble profits, which turned in to losses when the bubble burst.

Ezzie said...

It's not just retirees (and I'd think they'd be less with more passive income).

It's many small businesses, which are often easily transported from one state to another.