Millionaire Migration: Does a Wealth Tax Cause Capital Flight?

by Nathan Liu, edited by Tammer Maraqa

For years, popular sentiment on the progressive left has been that policymakers need to ‘make the rich pay their fair share,’ generally through levying significant taxes on the wealthy. Last March, Elizabeth Warren proposed her ‘Ultra-Millionaire Tax,’ a wealth tax cosponsored by Bernie Sanders and another eight senators and 29 representatives. Warren’s proposal adds a fundamentally new type of tax on the net worth of households and trusts above $50 million – a tax on assets instead of just income and realized gains – which she believes is far more effective at getting the ultra-rich to ‘pay their fair share.’[1]  

There are many arguments on both sides of the policy regarding the efficacy, adverse consequences, and administration of a wealth tax. One argument that has received attention in the economic literature is capital flight: the risk that, due to a wealth tax, the wealthy take their assets abroad, avoiding the tax and harming the American economy. Opponents of a wealth tax warn of the ‘threat’ and ‘danger’ of capital flight, while proponents dismiss the phenomenon as merely a ‘myth.’ But what does the economic literature say about capital flight from wealth taxes?

It is generally accepted in economic theory that taxes affect the geographic choices of taxpayers. Research so far suggests that the real world matches theory. A 2020 literature analysis by Kleven, Landais, Muñoz, and Stantcheva indicates that taxes generally influence taxpayer location choice within and across countries [2]. In one such study, Agrawal and Foremny found that Spain’s top one percent are highly mobile across the 17 autonomous communities in Spain with an elasticity of 0.85 to net-of-tax rates.[3] Despite these findings, Kleven, Landais, Muñoz, and Stantcheva recognize that there are significant barriers to conclusive research on the question, including controlling for confounding incentives to relocate. Therefore, more specific literature on wealth taxes might shed light on Warren’s policy proposal.  

In 1990, 12 OECD countries had a wealth tax. Today, all but four have repealed such tax laws, for a variety of reasons, such as low revenue, reduced investment, and in some cases, capital flight. These countries provide interesting case studies for such capital flight risks. Brülhart, Gruber, Krapf, and Schmidheiny found that across Swiss cantons, a ‘0.1% increase in wealth taxes leads to 3.4% lower wealth holdings.’[4] Results on international migration are mixed. Jakobsen, Kleven, Kolsrud, Landais, and Muñoz concluded that the wealthy were more likely to out-migrate than otherwise during the enforcement of a wealth tax in Denmark. Still, this effect was concentrated on specific populations. They found that education was a predictor of mobility, with significantly more PhDs emigrating. The inverse was generally true for entrepreneurs and business owners, who were less likely to migrate than others until it came to the top two percent of entrepreneurs who were 40% more likely to migrate.[5] Pichet emphatically condemned the French wealth tax, estimating that €200 billion had fled France as of 2007 from their wealth tax.[6] In 2017, Britain implemented a reform similar to a wealth tax, which taxed income from foreign-held investments and targeted the top one percent of wealth. Advani, Burgherr, and Summers found a very modest emigration effect from this reform, concluding that international migration was financially and socially costly [7].

From these studies, it seems that generally, a wealth tax has some effect on migration, but the significance of capital flight and its application to the United States can’t be easily inferred from the literature. The closest equivalent to a wealth tax in the US is an estate tax, which applies at death. Bakija and Slemrod found that the number of estate tax filers declines as taxes on wealthy people in that state increase, yet the effect is relatively weak.[8] And, while people might be willing to move to a different state, would they be willing to leave the US? On face, it seems that movement out of a European country, where most of the cited studies were conducted, would be easier than emigrating from the United States. Regardless, Warren’s plan recognizes this possibility and includes a 40% exit tax on those with a net worth of over $50 million who want to renounce their citizenship to deter capital flight. Whether this provision will work or is even necessary is unclear. 
​
The literature on wealth taxes and capital flight is mixed but generally indicates some relationship between the two. Whether that relationship should have a serious policy consideration in the United States is a separate question that the economic research is quiet on. What it does indicate is that the ‘matter-of-fact’ view taken by both sides on capital flight is incomplete and overlooks a complex and nuanced economic issue. 

Note: The opinions and views expressed in this publication are the opinions of the designated authors and do not reflect the opinions or views of the Penn Undergraduate Law Journal, our staff, or our clients.

Bibliography
[1] Senator Elizabeth Warren. “Warren, Jayapal, Boyle Reintroduce Ultra-Millionaire Tax on Fortunes Over $50 Million,” March 19, 2024. https://www.warren.senate.gov/newsroom/press-releases/warren-jayapal-boyle-reintroduce-ultra-millionaire-tax-on-fortunes-over-50-million#:~:text=The%20Ultra%2DMillionaire%20Tax%20Act%20would%20create%20a%20fairer%20economy,and%20trusts%20above%20%241%20billion.
[2] Kleven, Henrik, Camille Landais, Mathilde Muñoz, and Stefanie Stantcheva. “Taxation and Migration: Evidence and Policy Implications.” Journal of Economic Perspectives 34, no. 2 (May 1, 2020): 119–42. https://doi.org/10.1257/jep.34.2.119.
[3] Agrawal, David R., and Dirk Foremny. “Relocation of the Rich: Migration in Response to Top Tax Rate Changes from Spanish Reforms.” The Review of Economics and Statistics 101, no. 2 (May 2019): 214–32. https://doi.org/10.1162/rest_a_00764.
[4] Brülhart, Marius, Jonathan Gruber, Matthias Krapf, and Kurt Schmidheiny. “Taxing Wealth: Evidence from Switzerland.” Cambridge, MA: National Bureau of Economic Research, June 2016. https://doi.org/10.3386/w22376.
[5] Jakobsen, Katrine, Henrik Kleven, Jonas Kolsrud, Camille Landais, and Mathilde Muñoz. “Taxing Top Wealth: Migration Responses and Their Aggregate Economic Implications.” Cambridge, MA: National Bureau of Economic Research, February 2024. https://doi.org/10.3386/w32153.
[6] Pichet, Eric. “The Economic Consequences of the French Wealth Tax.” La Revue de Droit Fiscal 14 (April 2007): 5.
[7] Advani, Arun, David Burgherr, and Andrew Summers. “Taxation and Migration by the Super-Rich.” SSRN Electronic Journal, 2023. https://doi.org/10.2139/ssrn.4568741.
[8]Bakija, Jon, and Joel Slemrod. “Do the Rich Flee from High State Taxes? Evidence from Federal Estate Tax Returns.” Cambridge, MA: National Bureau of Economic Research, July 2004. https://doi.org/10.3386/w10645.
[Image] Anneka. Paper Plane on a Travel Map Symbolizing Travel and Adventure. Shutterstock. May 8, 2010. Accessed November 8, 2024. https://www.shutterstock.com/image-photo/paper-plane-on-travel-map-symbolizing-52674835.