The Kleven, Landais, Muñoz, and Stantcheva paper (2019) reviews the growing economic literature on the effects of income taxation on people’s migration decisions. The paper highlights the data and identification challenges researchers face, and the large differences across people’s income tax sensitivity.
There are methodological challenges in linking migration responses to income tax changes…
Even though migration responses to income taxation have a long history in theoretical economic literature (see Tiebout, 1956) there has been scarce direct empirical evidence of such phenomena. In fact, according to Kleven et al (2019), only a dozen papers research real-world examples, all of which are relatively recent. There are mainly two reasons for this:
Data challenges because there is not much data that combines migration patterns and precise measures of location-specific earnings and tax rates. Researchers have dealt with this is by focusing on specific population groups for which such information is available such as football players (e.g., Kleven et al., 2013). Also, some Scandinavian countries do keep migration records that can be linked to administrative tax records.
Identification challenges regarding whether it was the tax rate, or some other reason, that led to the migration response. This partially is because it can be hard to estimate a person’s average tax rate due to the multiplicity of factors that affect it. This difficulty explains why a lot of the research has only focused on high-income individuals. At very high incomes, the marginal tax rate has been found to be a good proxy for the average one, and marginal tax rates are easier to calculate.
…and not all people react the same way to an income tax increase
The situation becomes even more complex once we understand how much the likelihood of relocation, in response to an income tax change, varies across individual and tax policy characteristics. For example, workers that do not rely on their location to generate their income are more likely to relocate in response to an income tax change. This is partially indicated by the Kleven et al. (2014) paper, which researched the Danish preferential tax policy scheme for foreigners. This was enacted in 1992, and it offered preferential income taxes to foreigners with an annual income above a threshold located around the 99th percentile of the earnings distribution. The study identified a much greater inflow in Denmark of professionals from the sport and entertainment industry, both of which do not rely heavily on location-specific resources. In terms of tax policy characteristics, tax increases in small tax constituencies (e.g. US states) have been linked to a larger migration response than in larger constituencies because of the closer proximity of the alternative location. Some other factors are illustrated in Figure 1, below.
Figure 1: People’s likelihood to relocate changes according to personal and tax policy factors
Data: Bonsai Economics, Kleven et al (2019). Note: upwards arrows indicate a higher likelihood of relocation in response to an income tax increase. Downwards arrows signify the opposite.
Conclusion
Overall, it is clear that the likelihood of relocation of people to income tax changes can vary significantly according to the population and tax specifications. As a result, it is important to remain cautious of broad narratives that higher-income taxation leads to emigration, as we would first need to analyse the tax change specificities.
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