Conservatives across the nation have claimed in recent months that progressive attempts to reduce the burden of budget state budget cuts by raising taxes on millionaires will do nothing but cause the to lower-tax states. “Ladies and gentlemen, if you tax [millionaires], they will leave,” said Gov. Chris Christie (R-NJ), who vetoed a millionaire’s tax not once, but twice.
But a new study from the Political Economy Research Institute at the University of Massachusetts, Amherst throws cold water on these claims, showing that millionaires don’t, in fact, move to avoid higher taxes (though they will engage in more tax avoidance, like shifting the composition of their income):
The evidence available in the research literature suggests that the worst fears of the policy debates over raising additional revenue from high-income households to sustain spending on public services are unlikely to materialize. The rich will not go on strike. They will not cease working, stop investing, or even move, but they likely will find ways to shift the timing and composition of their income in order to avoid paying taxes. The immediate result of this likely outcome is that revenue collections will fall below projected levels from static models that do not take tax avoidance into account. Tax revenue will certainly rise, as the elasticity of taxable income falls well below one, and is actually very low for many high-income groups. [...]
But against these considerations of the size of potential waste from increases in tax avoidance of rich households, policy makers need to weigh the real and current costs associated with underinvesting in basic services that matter to people and the region’s economic growth. Faced with several years of budget shortfalls, and more to come yet, state and local governments have cuts the budget of K-12 education, universities, and public safety. These basic services play a fundamental role in promoting economic growth, by training the future workforce, and making neighborhoods and businesses safe.
In the wake of the Great Recession, nearly every state has had to cut vital investments in education and infrastructure, and the study shows that the importance of these is outweighed by a possible increase in tax avoidance on the part oft he rich (and that avoidance can always be mitigated by proper tax enforcement). But while some states have tried to responsibly raise revenue to offset some of their cuts, others have pushed the pain entirely onto those who depend on government services, relying on claims that it turns out aren’t based in reality.