PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Washington.
We’re continuing our series of interviews with Jeffrey Thompson, who’s recently written a paper looking at ways states can raise revenue and what would happen if they raise taxes on the upper tier, on the 1 percent. Will they stop working? Will they stop investing? Well, as you’ll see if you watch the earlier episodes of the interview, Jeffrey Thompson concludes the rich will not go on strike. But will they just leave? If one state raises its taxes, will wealthy people just move out of the state or do something else to avoid taxes, for example, spend most of their time hiring tax lawyers to figure out ways not to pay the taxes?
So now joining us again to discuss this issue is Jeffrey Thompson. He’s a assistant research professor at PERI institute, University of Massachusetts, in Amherst. Thanks again for joining us, Jeffrey.
JEFFREY THOMPSON, ASSISTANT RESEARCH PROF., POLITICAL ECONOMY RESEARCH INST.: Happy to be here.
JAY: So let’s start with will they just hit the road. Will wealthy people simply figure out a way to at the very least change their official residence, so they go to some low tax state and avoid higher taxes? What do we know about this?
THOMPSON: We know a fair amount. There’s been a lot of good research in recent years. You know, for a starter on this topic, this is probably the most dramatic way that someone could respond, and it’s the one that, you know, keeps conscientious public officials awake at night, the idea that all of the rich people are going to up and leave the state. But in practiceâ€”and the reality is they actually don’t.
Why wouldn’t a rich person leave the state if you hike their income tax rate by a couple of percentage points? Well, they have ties to the state, meaningful, deep ties to the state, just like most people. It’s costly for them to move. It’s costly for them to sell their house. It’s costly for them to go through the process of finding new schools for their kids. They have business connections. They have deep ties to a community. And they appreciate quality public services, good roads, good schools, public safety, just like anybody else. And so when you look at, dig into the evidence on the migration behavior, we find that they don’t leave.
JAY: Well, is the reason for that, so far, at least, is because the states that have had income taxesâ€”millionaire taxes, sometimes it’s calledâ€”that these taxes have been rather timid, and they haven’t been enough, I think, in most cases to actually forestall or put off cuts in social expenditure? So is there some line that gets crossed that if the tax gets higher, and thus have more significant impact to put off those kinds of social spending cuts, but when you get to those numbers maybe people do leave? I mean, what do we know about that?
THOMPSON: In principle that’s got to be true. You know, if you think aboutâ€”.
JAY: There’s got to be some line you cross.
THOMPSON: There’s got to be some line. You know, if you think about it, if you’re deciding whether to live in state A or state B right next door, you know, you sort of keeping tabs on how big that difference is. And for $100, surely you’re not going to move. For $10,000, probably not. You know, there’s some research evidence that suggests that for your average person, the difference in terms of looking at the benefits measured over a lifetime, a lifetime of benefitsâ€”so over 20 or 30 years, the difference is going to have to be at least $300,000 to trigger you to want to even think about moving. But if you get to the very upper echelons, if you’re starting to talk about millions of dollars in differences, that’s going to inspire someone to leave.
So at some point, you know, clearly you’re going to have a big impact on people’s behavior. But now, in the current situation, where the highest tax rates, the highest marginal rates are right around 10 percent, that’s just not enough to trigger a meaningful response.
JAY: Well, how much more do you think rates should go or need to go so that there’s a real impact in not having to do so much cutbacks on the social expenditure side?
THOMPSON: There are two important ways to think about that question. One is how far could we go with temporary hikes that are essentially geared to be countercyclical. So back in 2010, or even early 2011, 2009, how far could states go in terms of temporary targeted tax increases at the bottom? I think there’s quite a bit of room for a few points higher, at least on a temporary basis. The case is stronger for temporary hikes in a downturn, because the overall problem facing the economy is depressed demand. And also, the long-term, households are going to move based on their perception of the long-term costs. So a temporary increase of a few percentage points is going to add up to very little over the lifetime of a very rich person. So you can go much higher on a temporary basis.
Over the long term we’ve got to conclude that the room to move on the part of state tax makers, state tax policy makers, is less. My paper doesn’t shed much light on exactly how high states can go. It’s probably reasonable to think that a couple of percentage points beyond where they are nowâ€”but it’s definitely less than the room to move in the short term.
JAY: Now, in your paper, you don’t address the issue of are there things states could do to make it less advantageous to move for the sake of tax avoidance. Have you looked into that at all?
THOMPSON: We didn’t look into that in the paper, but we do know that one of the likely ways of responding is not actually moving. It’s basically high-income peopleâ€”very high income people commonly own homes in multiple jurisdictions. And so it’s fairly easy for them to claim residence in a different state. So there are means of tax rules regarding residency that you could tighten up to make it harder for someone to claim residence in another state, and also just simply enforcing existing rules, doing a more solid investigative job on the auditing side to confirm, if you’re saying you’re only a part-year resident, are you really only a part-year resident. So there are administrative and auditing tools that states could use to minimize that type of behavior.
JAY: If they had the will to do so.
JAY: Well, the other big thing in terms of avoiding taxes, obviously, is not moving, but the first step would be: call your army of tax lawyers and figure out ways to avoid the tax, I suppose also even including, you know, ways to shift income offshore and such. But what have you found in terms of, so far at least, what’s the experience of tax avoidance when states do raise high income level taxes?
THOMPSON: This in fact is probably the most likely means of response by high-income households, and it’s the least costly as well. It’s very costly to up and move, to relocate yourself to a different state. It’s very costly to shut down a business, for example, or change a career, but it’s not very costly to hire tax attorneys or tax planners to help you find ways to get around it. And that’s probably the most abundant area that people are reacting in.
It’s important for policymakers especially, and, really, the general public, to understand that this is happening. But the primary impact of this kind of tax shiftingâ€”you know, using deductions more aggressively, using tax shelters more aggressivelyâ€”is that it actually diminishes the tax revenue haul that you would expect otherwise, but doesn’t necessarily impact the economy. Just because someone is sheltering some tax income more aggressively, they’re not less likely to make real investments. They’re making those investments to make as much profit as they can, and that doesn’t change anything. They’re not less likely to employ workers. That’s all based on economic fundamentals. It will mean that the tax policy change will bring in less revenue than it would otherwise, but when policymakers confront that reality and they ask themselves, we know we’re going to lose some money through aggressive tax planningâ€”. But that revenue loss pales in comparison to the revenue gained from actually following through and raising the tax.
JAY: So the devil’s really in the detail of how the tax is written as well, I would guess; that, you know, you might find a situation where a populist politician wants to talk about raising taxes on the rich and all that. But when you actually get into the wording of how the taxes get raised, that’s where the space either opens or doesn’t for tax avoidance. So it would really take a lot ofâ€”what’s the word?â€”scrutiny on the part of the public to make sure that these things, these measures really are tax increases.
THOMPSON: Yeah, I think that’s right. I mean, I guess I would shift the focus to the realâ€”the scrutiny should, of course, be on how much money is really going to be raised. But also, if the scrutiny is applied to the issue of how it’s going to impact the state or the economy, I think that’s an area of fruitful conversation as well.
You know, we expect that, you know, if you adopt, like New Jersey did, or Oregon or New York, if you adopt an extra income tax bracket on income above some threshold, above $500,000, that is going to raise real revenue. I mean, the evidence suggests in the case of New Jersey they raised $1 billion a year. You know, if Connecticut were to adopt a similar 2.5 point increase on those incomes, it would raise $800 million a year.
So we expect there to be real revenue. It’s just going to be offset by some millions of dollars lost in evasion. But the behavioral response, in terms of less jobs being available or less, you know, investment or less businesses, that’s what’s going to be, you know, not as dramatic, nearly so dramatic as what people might expect.
JAY: Thanks very much for joining us, Jeffrey.
THOMPSON: Thank you.
JAY: And thank you for joining us on The Real News Network.
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