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Nobel Laureate James Mirrlees (1982) and others (e.g. Piketty and Saez, 2012) have established that high tax rates encourage emigration. Within-countries, it has been shown, for example, that wealthy Americans emigrate to low-tax states to legally avoid taxes such as estate tax, inheritance tax, and sales tax (Bakija and Slemrod, 2004). Similarly, Swiss people emigrate to cantons with lower income tax rates (Liebig et al, 2007; Kirchgassner and Pommerehne, 1996).
Internationally, the same happens. Strong empirical evidence has been shown, for example, that preferential tax rates for high earners in Denmark have double the number of wealthy foreigners relative to lower-paid foreigners in this Scandinavian country (Kleven et al, 2014). Even soccer stars have been shown to move according to tax rates. As Kleven et al. (2013) have indicated, top domestic players are more likely to stay in their home country, foreign players are more likely to immigrate, and teams tend to be better, in places where top tax rates are low. When UK top marginal tax rates increased to 50%, even the legendary Arsenal manager Arsene Wenger said in 2009: “With the new taxation system [...] the domination of the Premier League will go, that is for sure”. And he was not wrong. In the 5 years before the implementation of the new taxation, English teams had reached the UEFA Champions League Final five times, and in the 7 years after the implementation of the increased top marginal tax rate, no English teams reached the final of this same tournament. Supposedly, Cristiano Ronaldo's partial reason to move from Manchester United to Real Madrid was due to this new English tax, while in Spain he could enjoy the so-called "Beckham Law." According to the Beckham Law, special foreign workers only needed to pay a flat 24% income tax (rather than the normal 43% required by high earning Spaniards) and are exempt from foreign-source taxation, i.e. territorial taxation.
Individuals accumulating wealth through capital income taxation are especially sensitive to taxation since capital is much more mobile than labor (e.g. Young and Varner, 2011). In other words, individuals living mostly of capital gains can simply move their fiscal residence and investments in a no-tax jurisdiction to be tax-exempt. For example, multi-billionaire Eduardo Saverin chose to emigrate from the US (and renounce US citizenship) to go live in Singapore, where the government only tax residents from income made domestically. Therefore, if Eduardo has his $9.4 billion (as of 2019) invested in a no-tax jurisdiction, like the Cayman Islands or the Bahamas, he can be fully tax-exempt, legally. On the other hand, if most of one's income comes from labor (like soccer players) this individual not only needs to move to a low tax jurisdiction but also probably needs to find a job in this low-tax country. Even if this individual can work remotely from a low-tax country, most countries tax labor income at the source, regardless of fiscal residence.
Governments are aware of such a threat of capital flight and emigration from highly skilled workers and consequently have been decreasing taxes on high earners. Between 2003 and 2008, for example, France decreased its top income tax rate from 48.1% to 40% and Germany from 48.5% to 45% (Simula and Trannoy, 2011), and many states have implemented preferential tax treatment for high earners (e.g. Liebig, 2004). More recently, many rich countries have put their permanent visas and passport for sale to the wealthy. As we already saw in a previous post, taxing the rich is almost impossible.