A common argument against raising taxes on wealthy Americans is that they will displace wealthy Americans, but research suggests such concerns may be overblown.
In her unsuccessful 2024 presidential campaign, Democratic candidate Kamala Harris promised to preserve most of Donald Trump’s 2017 tax cuts, with at least one notable exception: her tax increases on the wealthiest Americans.
Now, New York’s newly elected mayor has made a similar proposal. Among other plans, Zoran Mamdani wants to raise income taxes for the wealthiest New Yorkers by 2%.
“We will end the culture of corruption that has allowed billionaires (like President Donald Trump) to take advantage of tax evasion and tax cuts,” Mamdani said in his victory speech after the election on November 4.
In both cases, the idea is to generate revenue by taxing the wealthy and use that money to pay for other initiatives. Harris called for taxes on the wealthy to help finance the estimated $2 trillion national deficit. Mamdani, a democratic socialist, is calling for free city buses and a rent freeze in New York.
Taxing the wealthy has been effective before. During World War II, America’s wealthiest people endured top tax rates of over 90% to prop up the economy.
But will it still work?
Millionaires may escape tax hikes
A common objection is that raising taxes on wealthy Americans will displace them. They take steps to avoid paying taxes, such as leaving a city, state, or country or moving their wealth overseas.
Here’s how the opposition received Mamdani’s proposal.
New York Governor Kathy Hochul said she could veto the tax increase, saying it would encourage wealthy people to flee. “I don’t want to lose any more people in Palm Beach,” she told a television interviewer, according to the New York Post.
In a commentary for Reuters, financial writer Marty Fridson warned of “the likelihood, if not the probability, that many high-income earners will leave New York City to escape additional taxes.”
The New York Times has collected quotes from business leaders about their exodus from New York. Sample: “‘We may consider closing the supermarket and selling the business,’ John Catsimatidis, owner of the Gristedes chain, told the Free Press.”
Mamdani’s campaign estimates that a 2% tax on New Yorkers earning more than $1 million a year would raise $4 billion a year.
Of course, this prediction would go awry if enough millionaires left the city to avoid taxes.
Are warnings about a “millionaire tax” exaggerated?
Are the dire warnings too exaggerated?A wealth of research on taxes and their impact on immigration suggests that perhaps they are. But a lot depends on who you ask.
Kamorika Das, local policy director at the Institute on Taxation and Economic Policy, a left-leaning think tank, said tax hikes generally do not encourage wealthy people to move.
“Tax policy doesn’t really drive relocation decisions,” Das told USA TODAY in an interview earlier this year. “They’ve been claiming this for a long time, but there’s just very little evidence to support it.”
A 2023 study by the nonpartisan Fiscal Policy Institute found “no evidence of significant tax-motivated migration” from New York state even after the tax increase.
The main reason: The top 1% of earners move at a slower rate than other income groups. And when they move, it’s usually from one high-tax area to another.
In 2004, New Jersey raised the top income tax rate for high earners by 2.6 percentage points.
“A total of 37 billionaires left in the next year,” Lindsey Owens, executive director of the progressive think tank Groundwork Collaborative, told USA TODAY earlier this year. “But in that very same year, New Jersey’s millionaire population grew by more than 3,000 people.”
Not all researchers agree.
California loses high-income earners to taxes, study says
Fridson, the Reuters columnist, cited a study by the nonprofit California Center for Employment and Economics. It found that high-income individuals who left California incurred a net loss of $5.3 billion in personal income taxes over the five-year period since a 2016 ballot measure that extended tax increases on the wealthy.
Jared Walczak, vice president of state projects at the nonpartisan Tax Foundation, told USA TODAY in an interview earlier this year that New York’s tax increases “will raise revenue. There’s no question about it.” But tax increases “will certainly displace some people,” he said, adding that “the impact could be greater in New York City than it would be at the state or national level.”
Walchuk said leaving the U.S. over taxes is another thing. Moving from Manhattan to Hoboken, New Jersey is something else entirely.
“Leaving the country is much harder than leaving the state, and leaving the state is much harder than leaving the city,” he said.
Mr. Walchak points out that Mr. Mamdani’s proposed 2% tax increase would be a flat tax rate “down to $1” on all income earned by wealthy New Yorkers. This will raise the city’s top tax rate from approximately 3.9% to 5.9%.
At this rate, high-income earners “will end up paying more in city taxes in New York than they do in state taxes in most states,” Walczak said.
The remote work boom in recent years has created pandemic “boomtowns,” with generally low-tax cities filled with refugees from high-tax cities who can work remotely.
“You could work for a company in New York City, but you could take your home to Austin, Texas, where there’s no income tax,” Therese McGuire, a strategy professor at Northwestern University’s Kellogg School of Management, told USA TODAY in an interview earlier this year.
According to research by the Tax Foundation, states with high taxes tend to lose residents to other states, while states with low taxes tend to gain residents. Taxes are one of many factors, including work, weather, quality of life, and broader cost of living.
Other studies suggest that billionaire tax avoidance is occurring, but at a negligible rate, “to a very small extent.”
“We make decisions about where we live for ourselves and our families based on a variety of considerations, many of which are non-financial,” Owens said.
