December 19, 2018
Using individual-level information from social security records over a period of one decade, this research found that taxes have a significant effect on one’s desired living location.
In 2012, French actor Gérard Depardieu famously (or infamously) abandoned his French residence and citizenship when the French government created a 75-percent marginal tax rate for incomes above 1 million Euros. His move illustrates one of the most popular arguments against raising top tax rates: that increases can cause an exodus of people and income to leave.
Recent tax reform in Spain gave David Agrawal, an assistant professor in both the Gatton College department of economics and the Martin School of Public Policy & Administration, the perfect opportunity to properly study the issue.
With Dirk Foremny, an assistant professor at the University of Barcelona and Institut d’Economia de Barcelona in Spain, Agrawal completed a detailed study titled, “Relocation of the Rich: Migration in Response to Tax Rate Changes from Spanish Reforms.”
“In our research we study the mobility of top-income earners in response to income taxes,” Agrawal said. “In particular, do the rich move following income tax increases by state governments? This is an important question because if the rich are very responsive to state income taxes, this limits the ability of states to raise revenue.”
The aforementioned Spanish tax reform granted states the authority to set income tax rates, resulting in substantial tax differentials for high-income households. The research from Agrawal and Foremny used individual-level information from social security records over a period of one decade and found that conditional on moving, taxes have a significant effect on a person’s location choice. A 1-percent increase in the tax rate for a region relative to others lowers the probability of moving to that region by almost 2 percentage points.
“Focusing on the number of top-taxpayers, we estimate that higher regional taxes translate into a small decrease in the number of high-income individuals living in a region,” explains Agrawal. “Our model implies that the mechanical increase in tax revenue due to higher tax rates is larger than the loss in tax revenue from the net outflow of migration.”
While this research focused on Spain, it could also potentially apply to other countries, where income taxes are decentralized, including the United States.
“Our results provide evidence that taxes matter, but that the mobility responses are small enough that increasing taxes results in tax revenue increases. This result has important policy implications for many countries around the world with respect to whether states and localities or federal governments can most effectively tax income.”
Relocation of the Rich: Migration in Response to Tax Rate Changes from Spanish Reforms
David R. Agrawal, Assistant Professor in the Martin School of Public Policy & Administration and Assistant Professor in the Department of Economics at the University of Kentucky
Dirk Foremny, Assistant professor at the University of Barcelona and Institut d’Economia de Barcelona, Spain
Relocation of the Rich: Migration in Response to Tax Rate Changes from Spanish Reforms, 2018