Where star scientists choose to locate: the impact of US state taxes
microeconomicinsights.org
microeconomicinsights.org
The paper looks at corporate and income tax but completely ignores sales tax, so it treats Oregon as being the highest tax state (with a 9.1% income tax rate, 0 sales tax) while a state like Texas is treated as a 0% income tax state when it has an 8.25% sales tax rate for major urban areas.
Looking at their scatter plots the correlations they present look weak (the summary doesn't provide the numbers) and there is no credible theory for causation.
"Star Scientists" (defined as 99th percentile income earners, 300K+) don't make location decisions based on taxes, they make decisions based on who has the infrastructure to support their work and money to pay them.
Corporations might make decisions based on tax policy and they might have to take employee income taxes into account when creating a competitive compensation package for a high value employee, but one or two percentage points on the salary of a few high end employees is not going to move the needle on the overall corporate budget.
Obviously taxes are part of the big picture for corporations deciding where to locate but they are probably not a big part. A state advertising low taxes may be signalling that they are "business friendly" but they are also signalling that they have an overall poor business environment and are desperate to get people in the door.
Market theory suggests that taxes will adjust to an efficient level which is the maximum that individuals and corporations are willing to pay to locate somewhere. Consequently, you can judge that high tax states like California offer the best environment for business because the market is willing to pay their high taxes in order to locate there, while a hypothetical no-tax locale would be the worst environment for business because even a small tax would cause residents to leave.
Really what needs to be done is a measure of effective tax rates.
The ‘money’ is located in the Valley for sure, but remember those guys writing the checks aren’t paying the same kind of taxes the employees are. While the people that actually have to work at your startup are just scraping by despite the high salary. I ran the numbers and it would be cheaper for me to live 2 hours from Cupertino, buy a Cessna and commute via 20 minute flight each way than to live within 20 minutes drive — that cost difference includes buying and maintaining the airplane, hangar costs as well as a cheap car kept at te Reid airport in San Jose. Even having to drive occasionally due to weather makes that idea still more reasonable.
A standard engineer salary in the Valley isn’t enough to buy a house unless you win the equity lottery or save for 10 years for a down payment. Anywhere where housing is 40-50% of salary plus high taxes is a recipe for disaster — regardless of how many electric car charging stations or trains their might be.
Obviously this is a tangential issue to taxes, however it’s still a vital part of the calculus of being in SV.
I just wish I could commute to Nevada as that would be a huge savings, but a bit of a stretch for a twice daily Cessna flight.
So putting aside inflation and the like, assuming value held constant wouldn’t taxation property values “catch up” after many years? Or are there other factors at play besides the 2% limit?
The caps stay in place until the property changes hands. This applies to all property in California. Commercial? No problem. Second home? Same discounts. There's been talk about either abolishing or reforming Prop 13 via a split roll system, but it's a political third rail.
The tax rate is around 1.25% (limited by Proposition 13 to 1%, plus slightly more for infrastructure bonds). The low tax rate contributes to higher market prices. Proposition 13 is a very good system for property investors.
https://taxfoundation.org/how-high-are-property-taxes-your-s...
Texas is higher, and Illinois + many north eastern states are much much higher.
IMO the latter is preferable because of the above plus it doesn't accrue.
Suppose the rich can buy everything they need with 1% of their income, sales tax is 10%. Then, the rich are paying 0.1% income tax. If the poor have to spend 20% of their income on the same necessities, they are paying twenty times more tax per amount of income.
From a theoretical perspective it seems to me that income tax would favor economic growth while sales tax, which can't be avoided, would depress economic growth.
No, it just doesn't disincentivize investment, same as sales tax.
Now let's say that I am planning to invest in some new equipment in the next 6 months.
If I buy the equipment now I don't have to pay taxes. If I wait I do.
How is that not an incentive to invest?
Every dollar in business expense is discounted by the amount of income tax not paid. The higher the income tax the greater the discount on business expenses and the greater the incentive to do something with cash other that hoarding it.
If you wait until the next year, you'll don't have to pay the taxes next year instead of not paying them this year.
But my point is about income vs sales tax:
- 0 % sales tax, 10% income tax:
You don't pay taxes on what you invest (assuming deduction)
- 10 % sales tax, 0% income tax:
You don't pay taxes on what you invest (assuming deduction)
Result: You cannot claim that people are investing more just because you have income tax.
You could of course assume that putting a tax on everything except investment will encourage investment. But it's the same as if you raise the price of everything except water to encourage the consumption of water.
If you ask why this wouldn't work, think about how taxes affect disposable income.
No! The definition they use is "95th percentile of patents awarded", then they assume that these people are probably in the 99th income percentile. But they present no data to validate this assumption (at least in this summary of the journal article).
Personally, I'm not convinced that the assumption holds.
Edit: Also, the figure of 300K+ doesn't appear in the post, and a very quick poke around Wikipedia didn't confirm that number for the 99th income percentile. Do you have a source?
I got the income info from here: https://seekingalpha.com/article/4109731-united-states-incom...
1. They're independent, which means that they have their own taxing authority. Citizens in the ISD (Independent School District) get a bill yearly to pay the tax. So if you buy land here, you need to know what school, emergency services, water, etc. district you'll be in to get an idea of what your taxes will be (commonly in the 2-3% of your property value every year).
2. Because many ISDs are in low-population areas, or areas with low-value land (since the taxes are based on property values), ISDs in wealthy areas have what is called recapture. Which means that funds are taken from them and redistributed to the rest of the state. So people owning property in Austin, Houston, Dallas, etc. are funding schools in the rest of the state.
3. The tea party influence (deep conservatives) in the legislature is real. They do support better schools - only they support some subjects more than others. And some not at all.. But they only meet every 2 years so their influence is limited on the ISDs.
The state helps fund local school districts, and has been doing several things to reduce that amount every session ever since White was governor if my memory serves. For just one example there was an expose in the Houston Chronicle how the Texas Education Agency imposed a set percent limit on special education students so no matter what, if a school reported a percentage above that, the school was penalized heavily so school adminstrators played the game, and never found more special ed students than the TEA limit. The budgetary reason for this is special ed students cost a lot more per student.
There was a public radio expose but the story was in print first. http://www.houstonchronicle.com/denied/
Say I make $150k/yr.
Income tax will be taxed on almost all of it.
Sales tax will be taxed on what I spend. I'm pretty sure I'll spend a lot less than $150k/yr.
The effect of income tax for higher income folks vastly exceeds the effect of sales tax.
My assessment takes all of that into account. I live in one of the higher income tax states, and one of the lower sales tax rates. I have real numbers I can work with.
I pay over $6K/year in state income tax, and my income is nowhere near $150K.
Do the math: At a 10% sales tax, how much do I need to spend to match that? If I take all of my annual spending per year, a 10% sales tax would be less than $6K. And keep in mind we don't pay sales tax for housing and services. At 10%, my sales tax would likely be under $3K. Perhaps even under $2K.
>But you would pay the full sales tax on all your purchase, leading to a similar net effect.
Not true in many states. In one state I lived in the sales tax on groceries was 1%, and over 6% on everything else, for example. I believe I encountered a state with 0% sales tax on groceries, but high on everything else.
Except that assumption is wrong. State taxes are typically not progressive, even though they should be. The lack of progressive brackets at the state level is one of the sources of biggest economic injustice in our tax system in this country.
Forty-three states levy individual income taxes. Forty-one tax wage and salary income, while two states—New Hampshire and Tennessee—exclusively tax dividend and interest income. Seven states levy no income tax at all.
Of those states taxing wages, eight have single-rate tax structures, with one rate applying to all taxable income. Conversely, 33 states levy graduated-rate income taxes, with the number of brackets varying widely by state. California and Missouri each have ten brackets, the most in the country.
Some states have absurdly narrow banding in their brackets, "Missouri taxpayers reach the state’s tenth and highest bracket at $9,072 in annual income". Alabama's highest bracket starts at $3,000 for single filers.
Oregon has 4 brackets but they are 5%, 7%, 9%, and 9.9%. But the 9% kicks in at $8400, so even those at poverty-level incomes are paying that high. The fact that the next bracket starts at $125,000 would be notable if the jump weren't so pathetic. But the extra less than 1%? Come on… absurd. This does NOT count as progressive taxation by any real measure.
Point taken, but, there's a practical limit to how much a high earner can buy and thereby pay sales tax, but there's relatively less limit to how much a high earner can earn and thereby pay income tax. Kind of like shorting stock.
To say it another way, you can choose to limit your purchases, but you're highly unlikely to forgo income.
Orthoganally, both taxes greatly impact low earners, since most or all such wages must be spent. Sales tax impacts high earners much less than income tax.
Good point. But I would take it a step further. It's all taxes. For example, tax on energy, gasoline, etc., or property taxes.
The state and local govs require revenue. To think these entities exist but don't require revenue is simplistic, if not naive. Regardless of what form it takes, a tax is a tax is a tax.
For the sake of transparency, simplicity and efficiency (i.e., each tax has some infrastructure to implement it, police it, etc.) we'd be best served with a single trackable tax. As it is, we get nickled and dimed without realizing it. What's worse we (thr people) can't "manage" and can't hold accountable that which we can't identify.
TU;DR (too uncorrelated, didn't read). When I scrolled down and saw those poor regressions, I immediately decided to close the page.
If a star scientist chooses to remain where they began being a star scientist, that itself is a decision. And it's an obviously important one: a high-tax state may well be able to offset receiving migrating scientists if it creates more in the first place.
The account for this, you'd want to look at where star scientists start out, or simply look at per capita star scientists for each state. To ignore this strongly biases the article in favor of low-tax states.
I suspect that in practice, high-tax states tend to have more star scientists per capita than low-tax ones, simply because part of what they've done with greater tax revenue is invest into higher education that helps create those scientists. This would be not unlike how so many tech companies are headquartered in high cost metro areas, because those areas are more successful at creating those businesses, not at convincing businesses started elsewhere to move there.
Title: Where star scientists choose to locate: the impact of US state taxes Conclusion: Overall, we conclude that state taxes have a significant effect on the location of star scientists.
There is absolutely no causal link established in their data. They simply hypothesize one and then use it as a title.
Edit: Its also a summary (by the authors) of an actual research article that on a brief read is much more circumspect but still commits many of the same logical sins https://www.aeaweb.org/articles?id=10.1257/aer.20150508
Is top 5% of patents really a good measure of scientist productivity as opposed to published articles or research awards?
Is outmigration more relevant than absolute residency numbers? If "top scientists" choose to start their career in a high tax state and don't move, they will not show up in this study.
What percent of this rather arbitrary group are professors, working at large corporations, or some other affiliation?
What is the effect of outliers? No sample size is given and the individual tax rate effect doesn't look very robust in the scatterplots. Does that fact that a large amount of patent law gets set in Eastern Texas influence this more than taxes?
Even for the corporate tax rate effect that does look like a positive correlation, the effect could be due to one or a few large organizations moving their R&D department.
This just seems like some half baked regressions that aren't seriously trying to understand the issue.
In my field, one can have a long, storied, and impactful career that ends up with serious business national honors and never file a patent.
If multiple Ivy League schools come calling, this does offer you the opportunity to pick the one with the most beneficial tax arrangement.
Also, a lot of star inventors deliberately choose not to patent their work. Focusing on patents ignores people like Tim Berners-Lee whose work would have pretty much been worthless if he had patented it.
However, I call "correlation is not causation" on this particular article. It is highly possible that tax increases and migration are both linked to some third variable ('local conditions') and the /Testing the validity of the results/ section of the article does not convince me that this possibility has been ruled out. Establishing why there is a link here requires more information.
I have observed that governments hate raising taxes because it upsets voters. In practice, resistance to raising debt takes a back seat to upsetting voters. If a government is raising taxes, in my experience, the economy is struggling and making up the government budget with debt isn't an option (for whatever reason). It is possible that rate of tax follows a similar principle where prosperous regions need a lower rate to achieve a better result.
The point is, "A causes B" is a much stronger statement than "A and B are related". There is solid evidence of a relationship, because the core of their study is a statistical test of correlation. The causative elements here are of a speculative nature, because they didn't gather any data on cause. Cause is being extrapolated from a correlation, which is dangerous thinking. The conclusion here is a good one to be circumspect about.
Libertarian studies be like: "Money makers making money want more money not less. That's just science. You can't argue with science."
The individual one (first line) looks like a shotgun blast to me but the business one (second line) shows some correlation.
microeconomics.org is owned by the "Institute for Fiscal Studies," a British think-tank whose funders I haven't bothered to find. If you find the funders, I suspect you can predict the red lines.
If you had two job offers 10 years ago: either CA (good area) or TX (Austin) and got a mortgage. 10 years later Prop 13 would have severely limited the property tax growth of your house while property taxes on a house in TX would have ballooned.
Your taxes in TX would have gone up (and can go down) regardless of how much you make. You can max out your 401K to further reduce your taxes in CA while you really have no remedy in TX. CA encourages savers. TX often has to give tax breaks (property and sales) to large companies to locate there. Small businesses (grads starting tech startups that hire more grads) are left to pay the very regressive taxes that hurt them in regressive states like TX.
I would also argue that research clusters (both universities and companies who hire their grads) matter far more for grad job seekers than tax.
I really question if this article has any real value.
Even for us plebs, it can be a hefty chunk of change. Staying at the same job, I moved across the border from Maine to New Hampshire, and instantly started netting another $500 or so dollars a month.
http://www.bankrate.com/finance/taxes/taxes-cost-professiona...