Get ready for post Fiscal Cliff rates to reignite the debate on tax flight

Accountants, lawyers and other number crunching nerds are combing through the Fiscal Cliff deal to see what 2013 tax payments might look like.

The New York Times has already declared that post-Cliff tax rates might be “the most progressive since 1979.”

[The deal] raises the tax rate to 39.6 percent from 35 percent on income above $400,000 for individuals, and $450,000 for couples. The rate on dividends and capital gains for those same taxpayers was bumped up 5 percentage points, to 20 percent. Congress also reinstated limits on the amount households with more than $300,000 in income can deduct. On top of that, two new surcharges — a 3.8 percent tax on investment income and a 0.9 percent tax on regular income — hit those same wealthy households.

As a result of the taxes added in both the deal and the 2010 health care law, which came into effect this year, taxpayers with $1 million in income and up will pay on average $168,000 more in taxes. Millionaires’ share of the overall federal tax burden will climb to 23 percent from 20 percent.

Whether or not the Times is right about the historical significance of the rates – talented accountants are trained to sniff out loopholes like bloodhounds – both right and left will undoubtedly trumpet their views on progressive taxation as a result of the higher marginal rates caused by the deal.

The right will – somewhat ironically – be championing a French Hollywood star to tell a cautionary tale about the supposed dangers of left wing fiscal policy. On Thursday, French actor Gerard Depardieu flew to Russia to receive citizenship there – his passport was presented to him by none other than Vladimir Putin himself. France’s socialist president Francois Hollande is currently trying to implement a tax of 75 percent on income over a million Euros. This has, apparently, left Depardieu un peu furieux, and he has decided to defect to Russia, where income is taxed at a flat rate of 13 percent.

It’s worth mentioning, too, that he and Uncle Vova enjoy a close personal relationship – no small thing to be buddies with a leader of a notoriously corrupt country when you are considering moving there.

But when it comes to so-called tax flight, Depardieu’s “depart, adieu” (sorry) appears to be the exception rather than the rule – at least according to the Center on Budget and Policy Priorities:

On average, just 1.7 percent of U.S. residents moved from one state to another per year between 2001 and 2010, and only about 30 percent of those born in the United States change their state of residence over the course of their entire lifetime. And when people do relocate, a large body of scholarly evidence shows that they do so primarily for new jobs, cheaper housing, or a better climate. A person’s age, education, marital status, and a host of other factors also affect decisions about moving.

The CBPP also cited “perhaps the most carefully designed study to date” on tax migration in New Jersey. That report concluded that there was a massive gain in the Garden State’s tax revenue after it raised marginal rates on the rich in 2004, and that the outflow of taxpayers was minimal:

At most, the authors estimated, 70 tax filers earning more than $500,000 might have left New Jersey between 2004 and 2007 because of the tax increase, costing the state an estimated $16.4 million in tax revenue. The revenue gain from the tax increase over those years was an estimated $3.77 billion, meaning that out-migration — if there was any at all — reduced the estimated revenue gain from the tax increase by a mere 0.4 percent.

This makes sense. While some might be encouraged to pack up and leave because of a tax increase, it would be a very difficult conversation for most people to have: “Kids, say goodbye to all your friends, teachers and classmates. Mommy and daddy don’t want to pay more taxes on their millionth dollar.”

Detractors of the CBPP study have tried to discredit it by crying hypocrisy over its recognition that some people move because of higher taxes. But the existence of tax motivated migration is not the issue here. The CBPP, despite the unfortunately misleading title of its report (“Tax Flight is a Myth), is simply trying to point out that net migration due to higher marginal taxation is largely negligible, and that it won’t come close to canceling out the windfall state coffers enjoy as a result of demanding that richer people pay more.

It’s worth keeping that in mind the next time a prominent right wing blowhard threatens to move to Dubai if he or she doesn’t get the Bush tax rates back.

Samuel Knight

Samuel Knight is a freelance journalist living in DC and a former intern at the Washington Monthly.