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The effect of state taxes on the geographical location of top earners: evidence from star scientists

Author

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  • Moretti, Enrico

    () (University of California, Berkeley)

  • Wilson, Daniel J.

    () (Federal Reserve Bank of San Francisco)

Abstract

Using data on the universe of U.S. patents filed between 1976 and 2010, we quantify how sensitive is migration by star scientists to changes in personal and business tax differentials across states. We uncover large, stable, and precisely estimated effects of personal and corporate taxes on star scientists’ migration patterns. The long run elasticity of mobility relative to taxes is 1.6 for personal income taxes, 2.3 for state corporate income tax and -2.6 for the investment tax credit. The effect on mobility is small in the short run, and tends to grow over time. We find no evidence of pre-trends: Changes in mobility follow changes in taxes and do not to precede them. Consistent with their high income, star scientists’ migratory flows are sensitive to changes in the 99th percentile marginal tax rate, but are insensitive to changes in taxes for the median income. As expected, the effect of corporate income taxes is concentrated among private sector inventors: no effect is found on academic and government researchers. Moreover, corporate taxes only matter in states where the wage bill enters the state’s formula for apportioning multi-state income. No effect is found in states that apportion income based only on sales (in which case labor’s location has little or no effect on the tax bill). We also find no evidence that changes in state taxes are correlated with changes in the fortunes of local firms in the innovation sector in the years leading up to the tax change. Overall, we conclude that state taxes have significant effect of the geographical location of star scientists and possibly other highly skilled workers. While there are many other factors that drive when innovative individual and innovative companies decide to locate, there are enough firms and workers on the margin that relative taxes matter.

Suggested Citation

  • Moretti, Enrico & Wilson, Daniel J., 2015. "The effect of state taxes on the geographical location of top earners: evidence from star scientists," Working Paper Series 2015-6, Federal Reserve Bank of San Francisco.
  • Handle: RePEc:fip:fedfwp:2015-06
    DOI: 10.24148/wp2015-06
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    Cited by:

    1. Dechezlepretre, Antoine & Einiö, Elias & Martin, Ralf & Nguyen, Kieu-Trang & Reenen, John Van, 2016. "Do tax incentives for research increase firm innovation? An RD design for R&D," LSE Research Online Documents on Economics 66428, London School of Economics and Political Science, LSE Library.
    2. Owen Zidar & Juan Carlos Serrato & Eduardo Morales & Pablo Fajgelbaum, 2015. "State Taxes and Spatial Misallocation," 2015 Meeting Papers 877, Society for Economic Dynamics.
    3. Alex Bell & Raj Chetty & Xavier Jaravel & Neviana Petkova & John Van Reenen, 2017. "Who Becomes an Inventor in America? The Importance of Exposure to Innovation," CEP Discussion Papers dp1519, Centre for Economic Performance, LSE.
    4. Ross Levine & Chen Lin & Zigan Wang, 2018. "Toxic Emissions and Executive Migration," NBER Working Papers 24389, National Bureau of Economic Research, Inc.
    5. Roller, Marcus & Schmidheiny, Kurt, 2016. "Effective Tax Rates and Effective Progressivity in a Fiscally Decentralized Country," CEPR Discussion Papers 11152, C.E.P.R. Discussion Papers.
    6. E. Mark Curtis & Ryan Decker, 2018. "Entrepreneurship and State Taxation," Finance and Economics Discussion Series 2018-003, Board of Governors of the Federal Reserve System (U.S.).
    7. Xavier Giroud & Joshua Rauh, 2017. "State Taxation and the Reallocation of Business Activity: Evidence from Establishment-Level Data," Working Papers 17-02, Center for Economic Studies, U.S. Census Bureau.
    8. repec:eee:respol:v:47:y:2018:i:5:p:992-1005 is not listed on IDEAS
    9. David R. Agrawal & Dirk Foremny, 2018. "Relocation of the Rich: Migration in Response to Top Tax Rate Changes from Spanish Reforms," CESifo Working Paper Series 7027, CESifo Group Munich.
    10. Sachverständigenrat zur Begutachtung der Gesamtwirtschaftlichen Entwicklung (ed.), 2015. "Zukunftsfähigkeit in den Mittelpunkt. Jahresgutachten 2015/16," Annual Economic Reports / Jahresgutachten, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung, volume 127, number 201516.

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    JEL classification:

    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • J01 - Labor and Demographic Economics - - General - - - Labor Economics: General
    • J08 - Labor and Demographic Economics - - General - - - Labor Economics Policies
    • J18 - Labor and Demographic Economics - - Demographic Economics - - - Public Policy
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • R0 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General

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