Taxation Without Borders: How Elite Embeddedness Trumps Millionaire Migration

Abstract

During a period of rising economic inequality, the United States pursued a regimen of fiscal reform, drastically cutting top federal income tax rates. In recent years, however, a bold experiment in fiscal policy has been happening in U.S. states. Starting with New Jersey in 2004, nine states and Washington, D.C., have added new tax brackets at the very top of the income distribution. These “millionaire taxes” have been seen as policy levers that can bridge budget gaps and reduce income inequality. Indeed, in 2010, Congress itself began to add taxes that are limited to the highest brackets.

But are the fiscal and redistributive results of state-level millionaire taxes sustainable? Higher taxes raise the implicit price of the social contract, and elites may be well positioned to exit to a lower-tax state. Given the potential for millionaire migration, economists have long concluded that progressive taxation cannot affect inequality at the state level.

However, the migration mechanism that is fundamental to this theoretical conclusion has never been established. Economic elites are a hard-to-reach population, and difficult to study using traditional survey methods. The present study overcomes this problem by utilizing a new data source on millionaires—state and federal tax records, which collectively cover the entire millionaire population of the United States.

The three substantive chapters find that responsiveness of elite migrants to state income taxes is low. Contrary to conventional wisdom in both academic and policy circles, progressive taxation at the state level is possible, even with open borders between states. Tax flight is rare, and the evidence indicates that elite migration is constrained by social processes that embed elites in particular communities. This finding stands in stark contrast to the oft-conjured image of the jet-setting millionaire. The importance of place for elites, as for the general population, must not be underestimated. Place is constitutive of social and cultural capital. Indeed it is by virtue of such elite embeddedness that U.S. states (and European Union nations) can have progressive taxes. Regional redistribution regimes are possible in an era of increasing political polarization and rising geopolitical connectedness.