Study: Income taxes drive out the wealthy

There's been a migration of wealthy Americans between states to avoid high individual income taxes, new research shows.

The study, published by the American Economic Association and co-authored by economics and politics academics Traviss Cassidy, Mark Dincecco and Ugo Antonio Troiano, examines the effects of individual income tax on states' fiscal capacity and taxpayer migration. It finds that middle- and high-earning households with the financial wherewithal to move between states do so when income taxes become too high.

The paper analyzes data on state-level tax policies over a span of 110 years (from 1900 to 2010). It finds that income tax-adopting states increased their revenue per capita from 12% to 17%. However, total revenue did not significantly change due to the migration of wealthy contributors to lower-tax jurisdictions post-World War II. 

Michael Nagle/Bloomberg

Broadening the tax base has historically been thought of as the key to increasing state revenue, allowing governments to support strong economic development. The establishment of the income tax has been a major component of tax broadening in the U.S., but the extent to which it actually grows state governments' revenue is debated. 

The paper finds that wealthy Americans tended to move out of state when income taxes were too high, but have remained when income tax increases were minimal. And while income tax does allow states to increase their fiscal capacity on a per capita basis, wealthy taxpayers' ability to relocate acts as a partial check on this capacity. 

The paper concludes, "The return on fiscal capacity investments thus appears to be contingent on the elasticity of the tax base."