Saturday, February 02, 2013

Taxes And Migration

People move from high-tax states to low-tax states is a popular theory. This hypothesis is rational. Lower taxes spur economic activity which attracts prospective workers. Job opportunity drives migration. Without much rigorous analysis, the theory is an excepted fact of life. The conclusions reached are what Daniel Kahneman terms "System 1" thinking:

SPIEGEL: You say in your book that, in such cases, we leave the decisions up to "System 1."

Kahneman: Yes. Psychologists distinguish between a "System 1" and a "System 2," which control our actions. System 1 represents what we may call intuition. It tirelessly provides us with quick impressions, intentions and feelings. System 2, on the other hand, represents reason, self-control and intelligence.

SPIEGEL: In other words, our conscious self?

Kahneman: Yes. System 2 is the one who believes that it's making the decisions. But in reality, most of the time, System 1 is acting on its own, without your being aware of it. It's System 1 that decides whether you like a person, which thoughts or associations come to mind, and what you feel about something. All of this happens automatically. You can't help it, and yet you often base your decisions on it.

SPIEGEL: And this System 1 never sleeps?

Kahneman: That's right. System 1 can never be switched off. You can't stop it from doing its thing. System 2, on the other hand, is lazy and only becomes active when necessary. Slow, deliberate thinking is hard work. It consumes chemical resources in the brain, and people usually don't like that. It's accompanied by physical arousal, increasing heart rate and blood pressure, activated sweat glands and dilated pupils …

People moving from high-tax states to low-tax states appeals to our intuitions. So, it must be true. We accept the claim because our more skeptical/analytical self is lazy. Via Brian Kelsey, an academic stuck in System 1 mode:

We’ve all heard of the migration of U.S. population and jobs from the North to the South. Many of us are convinced it was because of the extra sunshine and warmth in the winter. Many think it’s because people no longer find shoveling snow attractive.

Add this into the mix as you seek to understand whether the southern states will continue to outpace the northern tier of the United States in the coming decade in terms of jobs and population.

Let’s face it. Employers come to Texas and other southern locations because they feel that they can make a higher profit. Taxes are a major consideration. So is the cost of labor. Clearly businesses are moving away from areas with a high concentration of unionized labor.

Dr. Mark Dotzour backs up his assertions by listing the states with highest and lowest concentrations of labor unions. Game over. Lower taxes and less unionization win.

Now for academics engaging in System 2 thinking. Do people really move for tax purposes? Conclusion:

"It is very difficult to see a migration response when you look at the people affected by the taxes," said Cristobal Young, an assistant professor of sociology at Stanford University, who has studied tax increases in California and New Jersey.

Not even the super-rich exit in large numbers after taxes go up in their states, according to a growing body of research that shows relocation decisions involve many factors beyond taxes. ...

... Critics argue that many other factors, including strong economies, drive population growth. In two separate studies - one of a 2004 tax increase for New Jersey residents earning more than $500,000 per year, and one of a 2005 California tax increase on those with income greater than $1 million - Stanford's Cristobal Young and Charles Varner of Princeton University found neither measure substantially impacted the supply of millionaires in those states.

In California, the pair found the highest-income Californians were actually less likely to leave after the millionaire tax was enacted than they had been before. One reason could have been that most Californians earning more than $1 million did so for only a few peak years, the authors said. So the added bite of the tax increase was brief.

Separate studies of tax migration in Canada, Switzerland and areas surrounding large U.S. cities have also found taxes played little part in location choices, which involved factors such as commute times, community attachments and real estate costs.

Migration to warm-weather states including Texas and Florida goes back at least 50 years, noted University of Connecticut tax law expert Richard Pomp. Back then, some of the states people were leaving, including his own, had no income tax either.

On the whole, taxes do not have a material impact on where people choose to live, said Mark Zandi, chief economist for Moody's Analytics.

"People live in California for lots of different reasons," he said. "It's very difficult for them to find somewhere to go that's comparable to that state."

Dotzour's rhetorical salvo is exploratory. He makes a case for researching the question. Cristobal Young and Charles Varner take up that challenge. The results are ironic. But Richard Pomp is the best example of triumphant System 2 thinking. He poses a natural experiment that controls for tax regime variation. This simple test reveals the influence of climate on migration, something Edward Glaeser has emphasized.

Most policy debates are in the realm of System 1 thinking. My experience is that bold statements about talent migration rarely survive scrutiny (i.e. System 2 thinking). Unfortunately, concerning economic development, intuition usually prevails:

Tax-cut advocates in Kansas, Nebraska, Missouri, Oklahoma and Louisiana have voiced concern that their states are not competitive with nearby no-tax states, such as Texas and Florida, and that the imbalance chases away citizens and jobs.

A test is coming in Kansas City, which straddles two states: Kansas, which cut its top income tax rate to 4.9 percent from 6.45 percent on January 1, and Missouri, where the top rate remains 6 percent.

"It remains to be seen what will happen with Kansas, but people are watching," said Missouri state Senator Eric Schmitt, a Republican, who has sponsored one of several tax cut proposals now pending in that state house.

"People are rational economic actors and they are going to make decisions that are best for themselves."

Emphasis added. Who can argue with that straw man? We vote with our feet. Seeking lower taxes is a rational choice. Kansas will win. Missouri will lose. Actually, I wouldn't be surprised if that is how things turned out. Proximity is an important variable for modeling migration. Within a region, tax geographic arbitrage can make a huge difference in residential decisions. The problem comes when we take that experience and map it onto a larger (i.e. inter-regional) scale. Eric Schmitt is guilty of sloppy, lazy System 1 thinking.

No comments: