The Myth of the Mobile Millionaire
In 2010, as California was moving forward with plans to raise taxes sharply on million-dollar earners, opponents issued dire warnings that the hike would drive away entrepreneurs and cripple the state economy. “There’s nothing more portable than a millionaire and his money,” warned the ranking Republican on the state Senate’s budget committee. The tax hike passed anyway—and California’s share of the nation’s million-dollar earners actually grew, reaching 18 percent in 2021. (Californians make up just less than 12 percent of the overall population.) And yet, when California recently considered a proposal to impose a wealth tax on mega-rich households, even some Democrats echoed the same old worry.
The idea of millionaire flight is one of America’s most persistent beliefs. Expert consensus holds that “redistributive policies should be undertaken by the most central level of government rather than state or local governments,” as one academic summary puts it. In other words, rich people can’t avoid high federal taxes, short of leaving the country, whereas if a state tries to impose a progressive tax code, its millionaires will decamp for lower-tax jurisdictions. And, indeed, state tax codes, which bring in about one-third of U.S. tax revenue, largely reflect this received wisdom. Unlike the federal system, which is fairly progressive, state and local tax systems on average shift money from poorer households to richer ones. According to a recent report by the Institute on Taxation and Economic Policy, “forty-four states’ tax systems exacerbate income inequality,” with the poorest 20 percent of households paying the highest effective tax rates.
Things don’t have to be this way. The notion that rich taxpayers will flee if the state comes for their money is mostly fiction. The most obvious clue comes from the existence of the small number of states, including California, New Jersey, Minnesota, and New York, that buck the overall trend by taxing rich people at higher rates. If the conventional wisdom were accurate, you would expect those states to be devoid of wealthy people. Instead, they are among the richest in the country.
A number of international studies from the past decade further undermine the idea of millionaire flight. In 2011, for example, Spain reintroduced its wealth tax. Crucially, the exact rate varied from place to place within Spain. In Madrid, the rate was zero percent, whereas in other places, it exceeded 3 percent—equivalent, under certain assumptions, to an income tax of more than 60 percent. Skeptics suggested that the measure would cause so much capital flight that it would actually cost the government money. Yet very few households moved to Madrid—hardly an undesirable destination!—in response to the tax, and the government raised $19 in new revenue for every dollar lost to relocations. A study of the Swiss wealth tax, which varies among cantons, found broadly similar results, as did studies of Scandinavian wealth taxes.
In this regard, Europe and America don’t appear to be too different. An analysis of confidential IRS data on earnings and relocations reported that “millionaires are not very mobile and actually have lower migration rates than the general population.” Researchers at the Stanford Graduate School of Business found that, much as in Spain, relocations sapped only about a nickel out of each new dollar in revenues from the 2010 California tax increase.
It makes sense, when you stop to think about it. Wealthy people tend to be more deeply embedded in their community and local institutions than the average person. And when it comes to the ultra-wealthy, we really aren’t talking about people who can do their job over Zoom. Whether it’s a public-company CEO, a private-equity manager, or the owner of the local car dealership, top-level managers and entrepreneurs are usually closely tied to their headquarters and the site of their business’s operations.
Even so, designing an effective, progressive state tax system isn’t as simple as just raising rates on top earners. Wealthy families, especially those whose money comes from investments rather than from a salary, have many ways to slash their tax bill without physically relocating. In a recent paper, David Gamage, Darien Shanske, and I explore the various “money moves” that wealthy households in the U.S. use to delay income until retirement (or death), when they are no longer tied to their business and can redirect their income to a low-tax jurisdiction such as Florida.
The simplest example is what we could call “the Musk.” Build your billion-dollar business in California but never sell any of the stock. If you find yourself in need of funds—say, to buy and destroy a social-media company—you can always borrow against the value of the unsold shares. Don’t sell until you’re somewhere with a lower rate.
What makes the Musk work is what tax wonks call the “realization” rule: the principle that we tax property only when it’s sold. This is supposed to make it easier to know how much the property is worth and to ensure that the taxpayer has cash on hand to pay the bill. For related reasons, the U.S. system has traditionally not treated borrowed funds as taxable income. Combining these two policies gives taxpayers a powerful option: the right to choose not just when but also where to pay taxes.
The federal tax base is mostly safe from these kinds of moves. The United States taxes its citizens’ income no matter where they live. A person who gives up their citizenship is taxed immediately on all of their property, as if they had sold it on the date of their expatriation. This kind of “exit tax” would probably be unconstitutional at the state level, however. Somewhat counterintuitively, then, states’ best answer to money moves is to impose a wealth tax on the extremely wealthy. A well-designed wealth tax could reach any asset a taxpayer owns, whether it’s stowed in an out-of-state pension account or held in a foreign corporation. Another approach would be to modify the realization rule for the wealthiest state taxpayers and to track changes in the value of their property annually; tax mavens call this “mark to market” taxation.
But what if millionaires really do start uprooting their life once the money-move loopholes get closed? As we’ve seen, a wealth tax didn’t cause mass migration in Spain. And Norway’s crackdown on wealth-tax avoidance didn’t lead to any big changes in mobility either, despite anecdotal reports of a few billionaires pulling up stakes. To see why that makes sense, consider Elon Musk again. If California had put a mark-to-market tax in place in time, he would have already paid taxes on his Tesla billions and had little to gain from moving to Texas.
Of course, if a state wants to tax annual value or changes in value, it has to figure out how much things are worth. In our academic work, my co-authors and I explain how to pull that off. For example, states can just wait until taxpayers actually sell, then charge interest. That would also help resolve the discomfort some voters seem to have with taxing assets before they’re sold.
Another objection might be that, even if established business owners don’t move, maybe the next generation of entrepreneurs will tend to prefer states where they can be assured that their lifetime tax burden will be low. There’s no current evidence that this is true. But supposing it were, the best response wouldn’t be to keep our current, broken system. A better compromise would be to lower the official top tax rates but close up the loopholes so that everyone is paying what they’re supposed to. That’s a classic of good tax policy: The more income there is subject to taxation, the lower tax rates need to be.
Whatever the precise solution, state fiscal systems badly need to be repaired. We shouldn’t let the myth of millionaire mobility prevent that from happening.