When I was a government economist, the orthodoxy in microeconomics was that people rarely ever moved over taxes. This has always struck me as incorrect, and I used to get into so many fights about it. I finally get to be proven right as people see the consequences of tax reform. (Yes, I am enjoying that.)
One of the pieces of evidence folks on the other side would cite is the willingness of very wealthy people to live in high-tax states like California, Illinois, or New York. To them, it was “proof” that lifestyle factors would outweigh less sexy things like taxes.
Getting this right is a pretty big deal to economists, because part of your job is “scoring” tax plans, or making predictions about how much new tax revenue a tax increase would bring in. If you thought people would roll over and pay the additional taxes, then a tax increase could be counted on to fund a bunch of new spending priorities. If you thought a tax increase would make them change their behavior, then you had a bit of a problem balancing your budget. It’s also a very big deal if your state or local government is taking on bonded debt to finance public works or infrastructure projects. You need to know that your tax revenue will be secure for decades to pay for public investments like those.
My argument to that has been that it’s the federal tax code that insulates high-tax states from their fiscal realities. Until last year, celebrities living in mansions in Malibu could push some of the tax costs for their lifestyle onto steelworkers in Philadelphia. That is to say, they weren’t being forced to decide between taxes and their lifestyle. You were paying their state and local taxes for them. Aren’t you nice?
In the upside-down world that Democrats now live in, the old federal tax code protected the middle class and tax reform is subsidizing wealthy people. This is an objectively false claim – most federal taxpayers don’t even itemize, and the legislation literally doubled the standard deduction – that can be directly refuted by looking at actual Treasury data. (Don’t count on 25-year-old journalism majors to sift through economic data though. Brainlessly repeating their favorite politicians is so much easier.)
But there is an anther piece of empirical evidence that suggests the old tax regime was largely benefiting rich people: rich people are now deciding to leave high-tax states, and they are doing it in droves. And they are taking their businesses with them. As I mentioned in my earlier piece, extreme wealth is extremely portable.
They now finally have to pay what they owe to live there. They can’t shift that burden to you. You aren’t being nice and subsidizing their Hamptons lifestyle anymore with the income you earn at your 9-to-5 gig. And being rational economic actors, rich people are now choosing to become taxpayers in states with more fiscally responsible governments.
Thanks to evil conservatives enacting tax reform and New York’s punitive tax system, Florida (specifically Miami) is getting its own Wall Street now. Billionaire investor Carl Icahn is moving his New York hedge fund to Florida next year. He is offering his employees $50,000 each to relocate to Florida with him. (Those who stay get fired with no severance.) He’s following several other hedge fund billionaires, including David Tepper, Paul Tudor Jones, and Eddie Lampert. And where the money managers go, traditional corporate headquarters will probably follow. See the fight over Amazon’s second headquarters for guidance on how jobs follow tax strategies.
This is an interesting shift in our country. You have younger generations relocating en masse to states with lavish government spending. You have the wealth moving away from them. This means state and local governments that are financially and politically dysfunctional now will probably only become more so.
You have younger generations that are skeptical of capitalism and trying socialism on for size. They have politicians who likely do know better selling them on the idea that they can successfully take wealth from people like Carl Icahn and use it to fund health care entitlements and student loan relief. But you can watch in real time how that won’t happen.
(You couldn’t raise tens of trillions of dollars taxing these folks even if they did just roll over and pay higher taxes. Biden and Klobouchar tried to point that out to an unwilling audience last night. Democratic spending proposals can now be measured in multiples of GDP, rather than fractions of GDP. (I keep telling Millennial friends that they should worry about how they are unlikely to see a dime of Social Security or pension income, let alone receive “free” health care. There isn’t a single entitlement program in this country that is solvent over the medium term.)
It’s bizarre to think about, but our nation is essentially sorting itself into numerate and innumerate populations over taxation and economic resentment. And the two groups are going to have wildly different qualities of life.