The threat that wealthy people will simply pull up stakes and move if their taxes are raised has often been deployed in an effort to prevent states from doing just that. However, a new paper (pdf) suggests that the threat has been greatly exaggerated.
The study, by Universeity of Massachusetts economist Jeffrey Thompson, reviews several previous studies of state tax increases and concludes that the wealthy are not only as strongly influenced as anyone else by the pull of community ties and the costs of moving but often find it easier to stay put in the face of tax increases than lower-paid workers do. Wealthier citizens also frequently feel that it is worth paying higher taxes to obtain increased public services.
Thompson has recently emerged as a strong advocate for higher taxes on the wealthy as an alternative to slashing state budgets. An article he co-wrote with fellow economist Robert Pollin, which appeared in The Nation in March 2011, pointed out that state tax revenues fell by 13% between 2007 and 2009, far more than during other recent recessions, and that the resulting spending cutbacks had created a vicious cycle that further deepened the recession.
“In general, raising taxes during a recession is not good policy,” they commented. “But if it must be done to help fill deepening budgetary holes, the sensible way to proceed is to focus these increases on wealthier households. Their ability to absorb such increases is obviously strongest, which means that, unlike other households, they are not likely to cut back on spending in response to the tax hikes.”
Photo of an expensive home in Florida by Mike Whaling, via Flickr