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I often see/hear this argument used as an argument against raising income tax, at least here in the UK. The argument being the rich will leave, taking their cash out of the country, resulting in damage to the economy.

I am always slightly sceptical about this argument. Have there been any documented cases of tax rises resulting in wealthier citizens leaving for places with lower taxes, in such numbers that the economy was harmed?

NOTE: I'm not talking about business tax here, I'm specifically talking about income tax.

A few references to this claim:

Some of the these articles claim evidence for this effect, but I have no way to judge the veracity or validity of this evidence.

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This questions is poorly defined. There is overwhelming evidence of rich people remaining in countries every time taxes increase. Do you mean if income tax is increased by a significant amount? Can you give a ballpark figure? –  Sonny Ordell Mar 16 '12 at 9:53
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@SonnyOrdell I am speaking to a commonly held belief. You say "There is overwhelming evidence of rich people remaining in countries every time taxes increase" - well that would be a good place to start with an answer. I assume the belief is that the greater the tax increase, the more heavily the impact will be felt. I want to know if there is any evidence of this. –  Groky Mar 16 '12 at 10:08
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Welcome to Skeptics! So we can address the right issue, please provide some references to places where this claim is being made. –  Oddthinking Mar 16 '12 at 10:51
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@Oddthinking: Ah sorry yeah - left that out. Added a few links now. Hope they're ok? –  Groky Mar 16 '12 at 11:09
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The claim I have heard is not that the rich will leave the country, but their taxes the country (they will arrange their things so that they are paying most of their taxes somewhere abroad, e.g by moving their official residence address). This gives existence to Tax havens. –  Suma Mar 16 '12 at 12:00

3 Answers 3

Yes, there are / have been tax exiles.

The actor Michael Caine says in this interview:

“I decided not to become a tax exile, so I stayed in Britain, but they kept putting the tax up, so I’d do any old thing every now and then to pay the tax, that was my tax exile money.”

Michael did leave Britain though, for the United States, in the late 1970s, when tax hit 82% for the super-rich.

“I realised that’s not a socialist country, it’s a communist country without a dictator, so I left and I was never going to come back. Maggie Thatcher came in and put the taxes back down and in the end, you know, you don’t mind paying tax.

Here is a chart of UK tax receipts (source):

tax receipts

And this is a chart of UK GDP (source):

gdp

Just eye-balling it, the correlation between pre- and post-Thatcherite tax regimes and GDP doesn't seem overwhelming. IOW, the return of Michael Caine and other tax exiles (which would presumably occur if tax rates were a dominant driver), isn't clearly visible in these large-scale data.

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Even if there was a correlation there is no evidence here that high tax rates cause low GDP, and even if there was a clear link that it was due to tax exiles leaving the country. –  DJClayworth Mar 16 '12 at 18:48
    
Sure, but the question is whether high taxes cause rich people to leave the country: Michael Caine testifies that in at least his case, yes. The broader question is (of course) harder to answer, but it was clearly not an overwhelming influence, at least in the case of the UK in the 1980s. It's not a complete answer ("harm to the economy" being a very low threshold), but it seems to argue against the strongest reading of the claim. –  Larry OBrien Mar 16 '12 at 19:01
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The question seems to be asking if raising taxes will cause the rich, collectively, to leave the country. If that is the claim being questioned, then individuals leaving due to tax hikes is not notable. –  Sonny Ordell Mar 17 '12 at 0:34
    
@Sonny Ordell I think the UK GDP chart addresses that, albeit at a very gross level. The dramatic change in tax incentives did not lead to a clearly-correlated large change in GDP growth, i.e., the re-patronization of former tax exiles does not seem to have caused a very dramatic increase in total economic well-being. Doesn't that speak to the question? –  Larry OBrien Mar 17 '12 at 1:56

No. There are too many ancillary benefits to staying. PlanetMoney did a story on this before. http://www.npr.org/blogs/money/2011/04/29/135813061/studies-rich-dont-flee-high-tax-states

Some people will move of course, and if it's convenient, some people will buy their toys in a low-tax jurisdiction (like a yacht or plane), but otherwise, most will stay.

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That looks like an excellent reference that you have found. To protect against link rot, could you please quote a little of the key text that shows why we should believe it? Even better, go to the original source and explain what the researchers did to reach their conclusions. –  Oddthinking Mar 25 '12 at 11:46

It's a well know fact, that if you raise taxes beyond certain level, the income from taxation will decrease as it will cause more people to avoid taxation. It's a direct consequence of applying supply-side economics. It's not a new concept, it's been described as early as 1377 in Muqaddimah of Ibn Khaldun. In modern days the concept is widely known as Laffer curve, name coined by The Wall Street Journal's writer Jude Wanniski. His article Taxes, revenues and the "Laffer curve" has been originally published in The Public Interest in 1978. This has lead to so called Reaganomics, of which important part were huge tax cuts. In 2004 Arthur Laffer revisited the concept with article The Laffer Curve: Past, Present, and Future

Laffer curve

Image (source): "A non-symmetric Laffer Curve with a maximum revenue point at around a 70% tax rate. This graph is based on the results from "How Far Are We From The Slippery Slope? The Laffer Curve Revisited" by Mathias Trabandt and Harald Uhlig, NBER Working Paper No. 15343, September 2009."

Note however, that this whole concept is opposed by advocates of Keynesian economics, which lately seem to be regaining public attention.

And for the question of "taking money and leaving"... Well, economist deal with abstract statistics, talking about if the rich will avoid taxes, but without getting into details how. According to the laws of economics they will any way they can, and offshoring to another tax jurisdiction is viable option.

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"...the income from taxation will decrease as it will cause more people to avoid taxation." A minor point that doesn't really change your answer: I don't believe that's quite the claim of the Laffer curve. The decrease in tax revenues isn't necessarily from any avoidance of taxation, but simply from decrease in taxable income. This can be driven by lack of investment, decrease in GDP growth, unemployment, and other consequences of tax increases. Tax avoidance is just one of those. –  kbelder Mar 6 '13 at 22:53

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