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Fewer Taxes, More Scientists

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Fewer Taxes, More Scientists

States that want innovators to move in need to lessen the burden on top earners. August 26, 2015

The ultimate resource, economist Julian Simon once declared, is human innovation. Many states and cities have taken him at his word, increasingly trying to lure those citizens most likely to beget innovation—especially the highly educated, knowledge-based workers dubbed the “creative class” by urbanist Richard Florida. But just how to bring those workers and the economic activity they produce to a state or city has been a subject of dispute. Florida himself suggests that the creative class is largely drawn by a certain urban lifestyle, an “indigenous street-level culture—a teeming blend of cafes, sidewalk musicians, and small galleries and bistros.” Creative-class advocates argue that taxes matter little to this group.

A new study suggests they’re wrong, and that state tax rates do affect the migration of highly paid workers—in this case, coveted “star scientists.” The study, by University of California-Berkeley economist Enrico Moretti and Daniel Wilson of the Federal Reserve Bank of San Francisco, and published by the National Bureau of Economic Research, estimated that a nearly 1 percentage point decline in New York State’s top tax rate produced a 2 percent gain in net migration of scientists—with fewer leaving a place and more willing to come there. State taxes thus have a significant influence on the “location of star scientists and possibly other skilled workers,” the authors contend.

Moretti and Wilson begin their work by observing that even though tax rates vary widely across states, and some states aggressively advertise their more “business-friendly” taxes, little research has been done on the impact that taxes have on the location of high earners. The authors focus on what they call “star scientists”—those among the top 5 percent of patent holders—because this is a well-paid, highly mobile group whose job changes can be tracked. Their findings suggest that these sought-after innovators are more than three times more likely to move than the typical American worker. Of course, taxes alone don’t govern the choices these workers make. The overall number of scientists in any state is influenced by a host of factors—from the presence of research facilities to clusters of companies that employ scientists. The authors’ aim, however, is to measure how much “tax shocks”—that is, sudden changes in tax policy—influence the flow of these workers. Their research suggests that tax changes that influence the top 1 percent of earners drive the migration behavior of star scientists. By contrast, the study finds that changes in marginal tax rates for middle-income people produce no discernible effect on the migration of top scientists. That’s a significant finding, because in recent years, under pressure to raise revenues without hiking taxes widely, states like California, New York, and New Jersey have increasingly instituted taxes targeted only at high-income workers—so-called “millionaires taxes.”

As an example of how the job dynamics play out, the study cites New York’s decision in 2006 to let a temporary tax surcharge on the wealthy expire. The authors estimate the net effect was to reduce outmigration of scientists from New York by 1.1 percent and increase migration into the state by 1 percent. While that might seem small, the authors remind us that just a few top scientists moving into a place signifies deeper economic activity: “The presence of star scientists in a state is typically associated with research and production facilities, and in some cases with entire industries.”

These findings are consistent with those of previous studies of the migration of highly paid workers among countries with different tax rates. A 2010 NBER study of 14 European nations found that tax rates had a significant effect on where the highest-paid soccer superstars chose to play. Tax reforms, the study found, produced discernible changes in migration. In 2004, Spain changed its law to allow nonresidents to be taxed at a flat 24 percent rate. “Spain saw its share of foreign players increase while nearby Italy, which had a similar top league, saw its share of foreign talent shrink,” according to an NBER summary of the research. A similar study of a Danish law that gives highly paid foreigners preferential tax treatment if they migrate to Denmark found that the law sharply boosted the number of highly compensated workers.

The sluggish economic rebound since 2009 has sparked competition among states for jobs, and tax policy has played a crucial role. Under former governor Rick Perry in 2013, Texas touted its low tax rates in controversial ads that ran in New York and California. Florida governor Rick Scott greeted the 2014 election of Tom Wolfe as governor in Pennsylvania as an opportunity to invite Keystone State businesses to head south to avoid Wolfe’s proposed new taxes. Even New York governor Andrew Cuomo, in advocating for tax cuts last year, opined that the Empire State “had no future as the country’s highest taxed state.” While its spokesmen might deny it, the creative class seems to agree.

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