Will the rich really run away from higher tax? And if so, does it matter?

Whenever high taxes on the super-rich are up for discussion, we frequently hear the argument (usually from the super-rich or their friends!) that this will result in a devastating loss of talent and investment as these individuals flee the country. But is this really going to happen? And, if some do leave, will it really have serious consequences for the economy? I don’t think so – here’s why …

Let’s accept at the start that we’re only talking seriously rich: the overwhelming majority of people who choose to change countries do so for a new job (or to beachcomb), but for only a very few is tax a major part of the decision process – though it may figure in the negotiation of a salary package.

Look, for example, at the recent French proposal for higher tax rates (75% instead of 45%) on incomes above one million euros a year (£800,000 / $1,300,000). Someone blessed with an income of twice that will pay an extra €300,000 a year in tax for the next few years, so has some incentive to go. However, they’d still be taking home €837,500 a year after tax (€16,000 a week), so won’t be short of petty cash at the end of the month if they stay on.

The first question to ask is: “why haven’t they moved already?” For the truly globally mobile, there are plenty of tax regimes in the world that would get them nearer to paying 10% or 15%. Doesn’t have to be a small island far from anywhere, as even the United States, as we know from the much-discussed analyses of Mitt Romney’s tax affairs, only charges 15% tax on investment income. And many people with earnings at this stratospheric level have great latitude in moving their income between wages and dividends from a company they own.

So, let’s look at a few examples of why people can’t or won’t move. What about those who are doing a job where they’re paid for turning up and doing real stuff? This ranges from professional footballers to captains of industry. According to an analysis of US tax returns (1), this group makes up the majority (around 60%) of the top-earning 1%. Most of these individuals cannot change country without giving up the current employment that pays them this income: in practice, while a manager in a global company, or a striker for Paris St Germain, could move, it would have to be to a new job, and they would be replaced by another striker / manager with similar skills and tax-paying capacity. Unless anyone thinks it would pay Manchester United as a whole to move to another country? No, I thought not.

Executives, managers and supervisors outside the financial professions make up more than a third of the highest earners, and two-thirds of these individuals are salaried. The remainder work in closely-held (ie mostly family-owned) companies, and are very unlikely to leave the family business for another country – and even less likely to be able to take the whole company with them. People also rarely move as individuals – they take their families with them – and this may be one of the main reasons for staying put: children and partners have their own agendas and reasons for not moving.

We also know, for example from Dan Pink’s analysis in Drive, that once people are earning enough to live on, they aren’t that motivated by more money, nor does giving them more money improve their performance. What people want is the opportunity to be innovative and to be involved in things that they perceive to be meaningful or worthwhile. These are the real incentives.

There is a large group of medical and legal professionals who make up nearly one quarter of the top 1% of earners (16% medics plus 8% lawyers). They might move for more money even though what they are doing is worthwhile but may have to re-qualify in a new jurisdiction. Not something many senior and more highly paid professionals would contemplate.

Even in the world of global finance (finance high-flyers make up another 14% of the top 1%), a high-earning derivatives trader really can only ply their trade in a few cities in the world, and there are already plenty of people doing that job in those other cities. This doesn’t even take into account the question of whether the economy of a country is better or worse if it has less derivatives traders working there.

What about artists and entertainers? This set often supplies good copy for journos on the subject of tax. A surprisingly large proportion of those people only really have an audience in one country: a highly-paid British comedian who changes country to avoid tax will likely also avoid income unless they come back to do their work in the only country where their name (and jokes) mean anything. Rock stars with global sales can indeed leave. The Rolling Stones have mostly been resident in the south of France for 4/5ths of their 50-year career, and presumably must be thinking of rolling on again, but the world still doesn’t see them as a French rock group. Also, despite their visibility, arts, media and sportspeople make up less than 2% of the top 1% of earners.

Which brings us to the other big group of the rich – people who earn most or all of their money from investment – though I prefer the good old pejorative, “unearned income”. These people really can live anywhere in the world – and many do already inhabit low-tax islands in the Caribbean and elsewhere, such as Richard Branson. When looking at the economic impact of these peoples’ choices, the important question is not: “where do they wake up each day?”, but “where do they make their investments?”. Their home economy suffers only marginally from their exiting the tax regime – and, let’s face it, most of them employ enough lawyers and accountants to ensure they pay very little personal tax anyway. The economy only suffers if they withdraw their investments. Is Richard Branson going to sell up all of the Virgin companies to invest in new industry on his Caribbean island? A) there isn’t anything there to invest in; B) he went there to get away from the hives of industry, anyway; and C) whoever bought these businesses would continue to run them and invest in them.

So, question answered. Most of these people aren’t going to leave. Some of those who do leave we’d be glad to see go. The economy is unlikely to suffer much either way. QED.

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(1) Bakija, Cole & Heim (2102) Jobs and Income Growth of Top Earners and the Causes of Changing Income Inequality: Evidence from U.S. Tax Return Data