If you lived in a bad neighborhood and was frequently robbed, you would either defend yourself or leave. Most people are more inclined to take the less confrontational route than emulate Paul Kersey, the vigilante played by Charles Bronson in Death Wish.

Anyone with a minimal understanding of human nature would understand that raising taxes on the rich would have the effect of the rich either moving or otherwise structuring their affairs to reduce their tax payments. Sometimes taxpayers will even go to illogical extremes to avoid taxes.

The rich, more than most citizens, are less tied to a location because of a job they cannot afford to lose.  It is much easier for them simply leave and go to a state or a country that is less likely to victimize them. It should be no surprise that states increasing taxes on the wealthy are seeing them flee, and states with lower tax rates are seeing their revenues grow as these upper class refugees settle in their more hospitable states.

But even those who remain in confiscatory political environments are more adept at structuring their affairs to reduce their burden. Sometimes this involves trusts that the wealthy are more likely to use and sometimes it just involves shifting assets from one kind of investment to another.  Raise taxes on dividends and capital gains and they will reduce their holdings of assets that pay high dividends and capital gains.

They may shift money into tax free bonds and they may invest in real estate that appreciates with no annual income stream.  They may decide to spend the money on consumables that they can enjoy now, rather than delay gratification for future growth, which the state is confiscating in advance.  They will likely shift money from financial assets that are easily reportable and taxed to tangible assets like art, coins, or land.  The net result is less revenue as a result of higher taxes on the wealthy.

In the Wall Street Journal/ Opinion Journal Online this outcome is demonstrated yet again in Ducking Higher Taxes – Oregon’s vanishing millionaires (12/21/10). Excerpt:

One reason revenues are so low is that about one-quarter of the rich tax filers seem to have gone missing. The state expected 38,000 Oregonians to pay the higher tax, but only 28,000 did. Funny how that always happens. These numbers are in line with a Cascade Policy Institute study, based on interstate migration patterns, predicting that the tax surcharge would lead to 80,000 fewer wealthy tax filers in Oregon over the next decade.

The tax wasn’t enacted into law until June 2009 but was retroactively applied to January 1, 2009. So for the first half of the year wealthy Oregon residents weren’t able to take steps to avoid the tax ambush because they didn’t see it coming. This suggests that a bigger revenue loss from tax mitigation strategies will show up on tax return data in 2010 and 2011. The Revenue Office has already downwardly revised tax collection projections for the first three years by one-third.

If Salem officials want to find where the millionaires went, they might start the search in Texas, the state that leads the nation in job creation—and has a top income and capital gains tax rate 11 percentage points lower than Oregon’s.

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