4 ms·

Will a ‘Millionaire Tax’ Cause an Exodus of Talent?

10 points by robg 18y ago

dschobel 18y ago
It's bizarre to hear the author use redistribution in a positive-light. That's normally a conservative attack word (like amnesty).
- dmh2000 18y ago
  economics as a science is generally neutral on redistribution as to whether it is 'good' or 'bad'.
peregrine 18y ago
I'd say no. People don't live in the Bay Area cause the housing is so affordable or cause the taxes are so low or cause the air is so clean. Do the math.
- dschobel 18y ago
  They did the math. Read the article.
- falsestprophet 18y ago
  What math?
jemmons 18y ago
Only if they're doing it for the money.
- patio11 18y ago
  Its not just about money, though. There is a psychological element to it. A 1% pay cut would have no appreciable impact on my standard of living, but it would communicate that my company was not interested in keeping me around, and I would probably respond accordingly. That is a hair trigger sensitivity to 1%, where I know I make something like 50% less than the market wage I'd get in California or (certain jobs in) Tokyo. But I mentally file that differential away as fair, where the pay cut would be taking something I've already "earned". Similarly, I think a lot of people are more concerned with the notion that they're being scapegoated or screwed by the government than they are actually concerned by a rigorous accounting of what they are paying in taxes. (A huge number of very intelligent people do not understand progressive taxation, at all. They think if you cross into the next bracket you suddenly owe thousands more if you cross the threshhold. They think they pay marginal taxes over $1 on their last $1 of income. etc, etc) You can hear some of that frustration in the recent discussion of "going Galt". Is it rational? Eh, its real. Governments should understand how it affects them prior to getting bright ideas about covering shortfalls by increasing taxes. (Speaking of which: the people who are most likely to interpret the tax code accurately and objectively are professional tax advisers. You know who uses professional tax advisers? Well, almost everybody these days, but in particular people who stand to save a lot of money on taxes if they get good advice. That would include pretty much anyone who can afford to move for tax advantages. Another thing to consider, oh bright policymakers. Rich people have a lot of options for structuring their financial affairs such that their total tax burden is minimized. Heck, I know I have a lot of options, and I'm nowhere close to rich.)
  - gaius 18y ago
    A 1% pay cut would have no appreciable impact on my standard of living, but it would communicate that my company was not interested in keeping me around, and I would probably respond accordingly. Given the UK's recent announcement of a new 50% rate of taxation for the highest earners, the only thing keeping those people around is that tax is even higher in Paris. If Amsterdam or Frankfurt played its cards right, it could be the new European financial capital almost overnight, and then the UK's economy which has been propped up by financial services for years would be well and truly fucked...
russell 18y ago
I dont think so. People with incomes over $500K have the economic flexibility to live where they want. Will a millionaire move from Long Island to Conn. to lower hes taxes? In general no. Northern CA is a magnet for talent and millionaires in spite of expensive housing, high taxes, and miserable transportation. The weather is good though. These considerations hit the middle class harder. During downturns people leave CA, because of the costs.
- ryanwaggoner 18y ago
  The comparison of Northern CA to NYC isn't really a fair one, as there are no non-CA options for living in the Bay Area, but you can live in CT and still do business in NY.
  - russell 18y ago
    Agreed, but I dont think many high income individuals will pull their families even from Westchester to Conn. to save a few $K. Also taxes follow your place of employment/business not residence. So someone who has to commute to Manhattan isnt going to save anything.
- Kadin 18y ago
  > Will a millionaire move from Long Island to Conn. to lower hes taxes? In general no. I'm not sure why you don't think they would. It's not as though lots of people don't already commute from CT and NJ into New York. There's commuter rail, and probably less traffic than you'd get on Long Island. CT's southwestern towns in particular used to have a reputation as the suburb for the wealthy (the so-called "Gold Coast" area), in large part because it didn't have any personal income tax at all. That's no longer the situation, but if NY decides to play the class-warfare game, the rich can take their money elsewhere quite easily.
- tc 18y ago
  Your thought process is suffering from selection bias. You're thinking to yourself, "California taxes are high but lots of smart people still live there." Yes, those people do, because there are enough offsetting positive factors for these folks that CA is still a reasonable deal for them compared to the alternatives. There are also plenty of smart and wealthy folks who live in Colorado, Nevada, New Mexico, and Florida, in part, because the taxes are lower. As with any marginal change to a policy, you have to look at the effect on the marginal cases. You have to ask, "if taxes in CA were reduced by X%, what Y% more smart and wealthy people would choose to live there?" I guarantee Y > 0 for any X > 0.
indiejade 18y ago
My colleague Martin Feldstein and Marion Valliant argue that states can’t really redistribute income at all, because wage rates respond quickly to changes in the tax rate. When the tax rates on low-income earners fall, their wage rates also drop, and when tax rates on high-income earners rise, their wages rise. These wage effects rapidly undo any attempt by the state government to create a fairer society. This is assuming that "high-income earners" pass their tax increases on to those lower-income workers below them? But isn't there also a cost associated with passing that tax on? There seems to be something wrong with this idea. . ..
- gaius 18y ago
  Yep, inflation.
- jcl 18y ago
  That assumption doesn't follow, at least not directly. Sure, the extra compensation for a highly taxed high-income employee could come from paying a low-income employee less, but it could also come from charging more money for the product or cutting expenses elsewhere (maybe by firing a few other high-income employees). I think the implication is that companies will naturally equalize after-(state)-tax incomes for high earners so that they don't go to competitors in other states with less-fair taxes. (And yes, the company may not operate as efficiently after reallocating funds to compensate for state taxes. I think this reinforces the article's point about cities being "near the peaks of their revenue hills".)
- dmh2000 18y ago
  it has nothing to do with that, its a supply/demand effect. its because at either end, people will work for a given effective wage. if taxes on low income (or high income) fall, their effective wage goes up so employers can pay less and still keep (or at least get new) employees. and vice-versa for tax rates rising. compare wages in neighboring Nevada and California. Absolute wages for tech employees are much higher in Cali, but because Nevada has lower taxes and cost of living. the effective wages are about the same. (well, that part is based on anecdotal info)
azgolfer 18y ago
The real cost is putting the money in the hands of government. Successful entrepeneurs are the engine of the economy. Government is by far the worst investor. They get around 50 cents on the dollar when they spend your tax dollars. As a charity, they are even worse, giving out 40 cents on the dollar. It's far better for Bill Gates to decide where to invest and donate than Nancy Pelosi.
- eru 18y ago
  "For a non-profit organization of its size, the federal government is surprisingly efficient. Most federal employees work in big box-like office buildings, not in $300 million monuments to an architect's ego." [http://philip.greenspun.com/materialism/early-retirement/ http://philip.greenspun.com/materialism/early-retirement/] (Just an interesting tid-bit. I mostly agree with your comment. Though I doubt all charity are as efficient as the Melinda-and-Bill-Gates-type.)
  - tc 18y ago
    The key point in Greenspun's sentence is, an "organization of its size." And he's right about that. It's amazing that a $3-4T/yr organization can do anything coherent at all.
gaius 18y ago
Taxing the rich always has costs, like reduced entrepreneurship and hours of work, but those costs may be worth paying to achieve greater equality. At what point is it worth taxing Henry Ford so much that we are all equally riding donkeys?
- req2 18y ago
  At what point is it worth taxing an argument so much that no one can take you seriously?
callahad 18y ago
I'm not so sure about the plot in the article. It looks a bit like the "Two-Handed Regression" method mentioned in ["The Management Myth"][1]: "The huntsman achieved some celebrity for having invented a new mathematical technique dubbed “the Two-Handed Regression.” When the data on the correlation between two variables revealed only a shapeless cloud—even though we knew damn well there had to be a correlation—he would simply place a pair of meaty hands on the offending bits of the cloud and reveal the straight line hiding from conventional mathematics." [1]: http://news.ycombinator.com/item?id=581487 http://news.ycombinator.com/item?id=581487
tc 18y ago
It is perfectly consistent to be in favor of soaking the rich at the national level but to be against such policies at the state or local level. No, it isn't. Policies that inhibit growth at a local level also inhibit growth at a national level. The effects may simply take longer to become visible.
- req2 18y ago
  I think the point is that a policy that dissuades the rich in Iowa will just push rich people out of Iowa to a much greater rate than a national policy that dissuades the rich in America will push rich people out of Iowa.

10 points by robg 18y ago

It's bizarre to hear the author use redistribution in a positive-light. That's normally a conservative attack word (like amnesty).

dmh2000 18y ago
economics as a science is generally neutral on redistribution as to whether it is 'good' or 'bad'.

peregrine 18y ago

I'd say no. People don't live in the Bay Area cause the housing is so affordable or cause the taxes are so low or cause the air is so clean. Do the math.

dschobel 18y ago
They did the math. Read the article.
falsestprophet 18y ago
What math?

jemmons 18y ago

Only if they're doing it for the money.

patio11 18y ago
Its not just about money, though. There is a psychological element to it. A 1% pay cut would have no appreciable impact on my standard of living, but it would communicate that my company was not interested in keeping me around, and I would probably respond accordingly. That is a hair trigger sensitivity to 1%, where I know I make something like 50% less than the market wage I'd get in California or (certain jobs in) Tokyo. But I mentally file that differential away as fair, where the pay cut would be taking something I've already "earned". Similarly, I think a lot of people are more concerned with the notion that they're being scapegoated or screwed by the government than they are actually concerned by a rigorous accounting of what they are paying in taxes. (A huge number of very intelligent people do not understand progressive taxation, at all. They think if you cross into the next bracket you suddenly owe thousands more if you cross the threshhold. They think they pay marginal taxes over $1 on their last $1 of income. etc, etc) You can hear some of that frustration in the recent discussion of "going Galt". Is it rational? Eh, its real. Governments should understand how it affects them prior to getting bright ideas about covering shortfalls by increasing taxes. (Speaking of which: the people who are most likely to interpret the tax code accurately and objectively are professional tax advisers. You know who uses professional tax advisers? Well, almost everybody these days, but in particular people who stand to save a lot of money on taxes if they get good advice. That would include pretty much anyone who can afford to move for tax advantages. Another thing to consider, oh bright policymakers. Rich people have a lot of options for structuring their financial affairs such that their total tax burden is minimized. Heck, I know I have a lot of options, and I'm nowhere close to rich.)
- gaius 18y ago
  A 1% pay cut would have no appreciable impact on my standard of living, but it would communicate that my company was not interested in keeping me around, and I would probably respond accordingly. Given the UK's recent announcement of a new 50% rate of taxation for the highest earners, the only thing keeping those people around is that tax is even higher in Paris. If Amsterdam or Frankfurt played its cards right, it could be the new European financial capital almost overnight, and then the UK's economy which has been propped up by financial services for years would be well and truly fucked...

russell 18y ago

I dont think so. People with incomes over $500K have the economic flexibility to live where they want. Will a millionaire move from Long Island to Conn. to lower hes taxes? In general no. Northern CA is a magnet for talent and millionaires in spite of expensive housing, high taxes, and miserable transportation. The weather is good though. These considerations hit the middle class harder. During downturns people leave CA, because of the costs.

ryanwaggoner 18y ago
The comparison of Northern CA to NYC isn't really a fair one, as there are no non-CA options for living in the Bay Area, but you can live in CT and still do business in NY.
- russell 18y ago
  Agreed, but I dont think many high income individuals will pull their families even from Westchester to Conn. to save a few $K. Also taxes follow your place of employment/business not residence. So someone who has to commute to Manhattan isnt going to save anything.
Kadin 18y ago
> Will a millionaire move from Long Island to Conn. to lower hes taxes? In general no. I'm not sure why you don't think they would. It's not as though lots of people don't already commute from CT and NJ into New York. There's commuter rail, and probably less traffic than you'd get on Long Island. CT's southwestern towns in particular used to have a reputation as the suburb for the wealthy (the so-called "Gold Coast" area), in large part because it didn't have any personal income tax at all. That's no longer the situation, but if NY decides to play the class-warfare game, the rich can take their money elsewhere quite easily.
tc 18y ago
Your thought process is suffering from selection bias. You're thinking to yourself, "California taxes are high but lots of smart people still live there." Yes, those people do, because there are enough offsetting positive factors for these folks that CA is still a reasonable deal for them compared to the alternatives. There are also plenty of smart and wealthy folks who live in Colorado, Nevada, New Mexico, and Florida, in part, because the taxes are lower. As with any marginal change to a policy, you have to look at the effect on the marginal cases. You have to ask, "if taxes in CA were reduced by X%, what Y% more smart and wealthy people would choose to live there?" I guarantee Y > 0 for any X > 0.

indiejade 18y ago

My colleague Martin Feldstein and Marion Valliant argue that states can’t really redistribute income at all, because wage rates respond quickly to changes in the tax rate. When the tax rates on low-income earners fall, their wage rates also drop, and when tax rates on high-income earners rise, their wages rise. These wage effects rapidly undo any attempt by the state government to create a fairer society. This is assuming that "high-income earners" pass their tax increases on to those lower-income workers below them? But isn't there also a cost associated with passing that tax on? There seems to be something wrong with this idea. . ..

gaius 18y ago
Yep, inflation.
jcl 18y ago
That assumption doesn't follow, at least not directly. Sure, the extra compensation for a highly taxed high-income employee could come from paying a low-income employee less, but it could also come from charging more money for the product or cutting expenses elsewhere (maybe by firing a few other high-income employees). I think the implication is that companies will naturally equalize after-(state)-tax incomes for high earners so that they don't go to competitors in other states with less-fair taxes. (And yes, the company may not operate as efficiently after reallocating funds to compensate for state taxes. I think this reinforces the article's point about cities being "near the peaks of their revenue hills".)
dmh2000 18y ago
it has nothing to do with that, its a supply/demand effect. its because at either end, people will work for a given effective wage. if taxes on low income (or high income) fall, their effective wage goes up so employers can pay less and still keep (or at least get new) employees. and vice-versa for tax rates rising. compare wages in neighboring Nevada and California. Absolute wages for tech employees are much higher in Cali, but because Nevada has lower taxes and cost of living. the effective wages are about the same. (well, that part is based on anecdotal info)

azgolfer 18y ago

The real cost is putting the money in the hands of government. Successful entrepeneurs are the engine of the economy. Government is by far the worst investor. They get around 50 cents on the dollar when they spend your tax dollars. As a charity, they are even worse, giving out 40 cents on the dollar. It's far better for Bill Gates to decide where to invest and donate than Nancy Pelosi.

eru 18y ago
"For a non-profit organization of its size, the federal government is surprisingly efficient. Most federal employees work in big box-like office buildings, not in $300 million monuments to an architect's ego." [http://philip.greenspun.com/materialism/early-retirement/ http://philip.greenspun.com/materialism/early-retirement/] (Just an interesting tid-bit. I mostly agree with your comment. Though I doubt all charity are as efficient as the Melinda-and-Bill-Gates-type.)
- tc 18y ago
  The key point in Greenspun's sentence is, an "organization of its size." And he's right about that. It's amazing that a $3-4T/yr organization can do anything coherent at all.

gaius 18y ago

Taxing the rich always has costs, like reduced entrepreneurship and hours of work, but those costs may be worth paying to achieve greater equality. At what point is it worth taxing Henry Ford so much that we are all equally riding donkeys?

req2 18y ago
At what point is it worth taxing an argument so much that no one can take you seriously?

callahad 18y ago

I'm not so sure about the plot in the article. It looks a bit like the "Two-Handed Regression" method mentioned in ["The Management Myth"][1]: "The huntsman achieved some celebrity for having invented a new mathematical technique dubbed “the Two-Handed Regression.” When the data on the correlation between two variables revealed only a shapeless cloud—even though we knew damn well there had to be a correlation—he would simply place a pair of meaty hands on the offending bits of the cloud and reveal the straight line hiding from conventional mathematics." [1]: http://news.ycombinator.com/item?id=581487 http://news.ycombinator.com/item?id=581487

tc 18y ago

It is perfectly consistent to be in favor of soaking the rich at the national level but to be against such policies at the state or local level. No, it isn't. Policies that inhibit growth at a local level also inhibit growth at a national level. The effects may simply take longer to become visible.

req2 18y ago
I think the point is that a policy that dissuades the rich in Iowa will just push rich people out of Iowa to a much greater rate than a national policy that dissuades the rich in America will push rich people out of Iowa.