By Nicolas Lecaussin, courtesy of IREF and Contrepoints
California is becoming the new France. Here we prefer the poor to the rich, and we do everything to tax and punish the well-off. Except it turns out it doesn’t work in California either — in fact it even has the opposite effect.
In 2012, a referendum raised the state income tax of the top marginal rate of taxpayers, earning more than $1 million, from 10.3% to 13.3%. Rates for people earning over $250,000 a year also increased by one to two percentage points.
The Democrats approved these measures. Later, in their study of Prop 30 Stanford economists Joshua Rauch and Ryan Shyu analyzed the reaction of those involved. They first noticed an increased number of departures among those whose income exceeded two million dollars, and an even more significant trend above five million: the percentage of departures rose from 1.5% to 2.125%. This essentially means that the probability of a wealthy resident leaving California increased by about 40% after the tax hike.
Next, the economists examined income trends by comparing tax returns before and after the tax hike. They found that, “The highest incomes in California are $522,000 less on average in 2012, $357,000 less in 2013 and $599,000 less in 2014.”
Economists gave no explanation, but individuals with higher incomes may have responded to rising taxes by working less or deferring pay.
In conclusion, according to the study, taxpayers’ migration and behavioral responses erased 45.2% of the expected gains from higher income taxes. This is all the more interesting because some economists, like Thomas Piketty , argue that the rich do not care about marginal tax rates and that raising the maximum income rate to 70% will not affect incomes or incentives to work.
Nicolas Lecaussin is IREF’s Director of Development. He is also a graduate of Sciences-Po Paris, former President of iFRAP (French Institute of Research on Public Administrations), founder of Junior Entrepreneur and author of several books on capitalism, the State and public policies. His last book published is “The French anti-liberal obsession”.