In response to increased tax rates, high-income earners often threaten to leave the location of their tax base. But do they actually follow through? A new article in the American Journal of Sociology, " Taxing the Rich: How Incentives and Embeddedness Shape Millionaire Tax Flight ," examines how increased tax rates incentivize top earners to relocate, and how the forces of embeddedness within their communities encourage them to stay.
Two recent events, write article authors Cristobal Young and Ithai Lurie, have reshaped the tax migration landscape, and therefore provide insight into the phenomenon of top earner flight: the 2017 federal tax reform known as the "Tax Cuts and Jobs Act" (TCJA), and the COVID-19 pandemic. The first, write Young and Lurie, incentivized migration by exposing more income to state taxation, while the second did by disrupting social ties. To observe the effects of these two upheavals, the article studies IRS data on all top income earners in the United States between 2016 and 2023.
Young and Lurie's research finds that while the TCJA overhaul did not lead to a significant increase in tax migration, the COVID-19 pandemic did – though its effects were temporary. This pattern, the authors write, suggests that high earners who left states like New York and California during the period of their analysis were motivated more by a decrease in embeddedness than simply by a desire for a lower state tax. This finding supports a theory of embeddedness in which social ties act as constraints on economically motivated decisions; for high earners, the social capital that derives from a network of personal connections can often be an enticement to stay put even in a state with high taxes.
Ultimately, the authors write, these results indicate that many factors make a state a "competitive" place to live and do business, not just lower taxes. Infrastructure and public services can also assist in the retention of talent, Young and Lurie conclude, and "competitiveness is not just about reducing costs; it also involves building opportunity and quality of life."
