Fun With Statistics – Tax Inflow/Outflow Edition

By Kevin Meyer

A few articles over the past week piqued my curiosity, again, on the impact of policy on global knowledge and wealth distribution.  Regular readers know I've mentioned how knowledge and capital are moving around the world these days.  Today we'll dive a bit deeper in this edition of Fun With Statistics.

First off is a post from TaxProf Blog, one of the top tax-oriented blogs.  Using an interactive calculator linked to IRS data, Paul Caron looked at the net migration of tax returns, and associated income, by state between the years of 1993 to 2008.  The results?

States with the most net outflow: New York, California, Illinois, New Jersey, Michigan, Ohio, Pennsylvania, Massachusetts, Louisiana, Connecticut.

States with the most net inflow: Florida, Arizona, North Carolina, Georgia, Texas, Nevada, Colorado, Tennessee, South Carolina, Washington.

Notice anything?  With the exception of Louisiana, which experienced a large amount of outflow migration as the result of hurricane Katrina, the states with the most outflow represent the states with the highest tax rates, the states with the most inflow represent the states with the lowest tax rates.

We're not talking small potatoes.  The amount of net outflow income from New York alone was $71 billion, the amount of net inflow to Florida alone was $97 billion.  The tax on that income could pay for a lot of social programs – or close deficits.

But it gets even more interesting.  Keep in mind that the inflow/outflow analysis above is based on IRS data, and therefore in effect changes in net due tax returns.  These days nearly 50% of the earning population doesn't owe any taxes – in effect no skin in the game – a potentially very dangerous situation.  So if you map tax return outflow vs. actual population change using census bureau data you notice that overall population outflow was lower than the tax return outflow, which means that the percentage of people paying no taxes but consuming taxpayer-paid services increased in those outflow states like New York.

In effect people actually paying taxes went down while people consuming taxes went up.  Now you understand why New York and California are in a bit of a pickle.

So what solution is usually proposed in New York and California?  Why, raise taxes even more, of course.  What do you think the result will be?  Yep, even more outflow, even less balance between tax payers and tax consumers.

Now let's go one step further, and the concept that is really concerning me lately.  Many high tax proponents point to tax rates of ages past where they are correct in stating that the top rates were far higher than they are now.  What they don't consider is that the world is a different place.

In the past the infrastructure, system of laws, and policy/regulatory stability made the U.S. a unique place to create wealth.  The danger and lack of systems in most of the rest of the world made wealth creation far riskier, which offset the higher tax rates.

Not today.  Now there are many countries with equal or even better infrastructure in terms of transportation, telecommunications, and such.  And one comment I heard several times in China was that although government and trade policy made business more difficult in China, it was far more predictable and stable than in the U.S. (especially now – what will taxes be even a few months from now?), therefore it was significantly easier to plan business activities.  Stability and the known is less risky than the volatile and unknown.

With that in mind we come to our final article, from The Los Angeles Times, on how a growing number of entrepreneurs, tax payers, and holders of wealth are moving out of the United States.  Not a large number now, but increasing.

Will the U.S. eventually be the New York of the world, losing business and taxes to the many lower tax countries with rapidly-developing infrastructures?  Where is the next Florida or Texas?  And if we spend more and tax more?