A new study unsurprisingly confirms a powerful economic truth – exceptionally talented people are more likely to move to states that lower their taxes. The study supports data from the American Legislative Exchange Council that economic competitiveness matters.
Enrico Moretti, a professor at the University of California – Berkeley, and Daniel Wilson, a research advisor at the Federal Reserve Bank of San Francisco, recently published the National Bureau of Economic Research working paper entitled “The Effect of State Taxes on the Geographical Location of Top Earners: Evidence from Star Scientists.”
The authors used almost 35 years of data on patents to examine how changes in tax rates affected the mobility of “star scientists,” meaning those scientists who have the most patents (in the top 5 percent of the distribution, to be precise).
Most of these star scientists are in the top 1 percent of income earners and make sizable contributions to job creation. “Unlike professional athletes, movie stars and rich heirs – the focus of some previous research – the presence of star scientists in a state is typically associated with research and production facilities and in some cases, with entire industries, from biotech to software to nano-tech,” said the authors.
And yet, some states are following policies that keeps these scientists away. When Moretti and Wilson measured tax changes over time, they found that states that raised personal marginal income tax rates subsequently saw a decrease in star scientists. States that cut marginal income taxes, on the other hand, saw an increase in star scientists moving to the state.
Changes in corporate tax rates achieved a similar effect, though only for private sector scientists and not government or academic researchers, further confirming the study’s findings.
Measuring the change in tax rates over time rather than a simple comparison of high-tax states to low-tax states allowed the authors to examine how migration of scientists would change in the years following a policy change. Moretti and Wilson stress that they found no evidence that the changes in mobility occurred before the tax changes were made – suggesting that the policy change was an important factor.
The authors recognize that this finding has important implications for state tax policy. “This previously unrecognized cost of high taxes should be taken into consideration by local policymakers when deciding whom to tax and how much to tax,” they said.