Taxation is always a problematic issue but the taxation of very high income earners is becoming an even more controversial subject in a number of countries. One problem with high tax rates is that it could lead high earners to move abroad. A new column at VoxEU.org suggests that top-tier inventors are significantly affected by top tax rates when deciding where to live. It is argued that the loss of such highly skilled agents could entail significant economic costs in terms of lost tax revenues and less overall innovation.
There is much debate, but little evidence, about the effects of high tax rates on high earners. The anti-tax side argue that higher top tax rates will cause an exodus of valuable, high income and highly skilled economic agents. They claim that high tax rates will unavoidably lead to a brain drain and an exodus of the most qualified people, especially as barriers to labour mobility between developed countries are reduced. The pro-tax side maintain that migration decisions are driven by other (possibly non-economic) considerations and would not respond very much to higher taxes.
It is generally acknowledged that non-human capital is highly mobile in a globalised world. This fact is used to justify lower taxation on capital. Much less is known about the mobility of human capital in response to taxation.
In their article, The effects of top tax rates on superstar inventors, Ufuk Akcigit, Salome Baslandze and Stefanie Stantcheva argue that inventors are highly valuable economic agents as creators of innovations and potential drivers of technological progress.
A group of highly valuable economic agents that policymakers perhaps might worry about is inventors, the creators of innovations and potential drivers of technological progress. Inventors may well be important factors for a country’s development and competitiveness – highly skilled migration has been shown to be both beneficial for a receiving country’s economy and to disproportionately contribute to innovation […].
Consider Alexander G Bell, the inventor of the telephone; James L Kraft, who patented a pasteurisation technique and founded Kraft Foods; Ralph Baer, the inventor of the first home video gaming console that contributed to the expansion of the video gaming industry; or Charles Simonyi, a successful product developer at Microsoft. In addition to being very prolific inventors, they had something else in common: they were all immigrants. This is not very surprising given that migration rates increase in skill […] and inventors are ranked very highly in the skill distribution.
It’s true, however, that inventors vary vastly in their quality and innovativeness. The big question is to do with the behaviour of the ‘superstars’: Do ‘superstar’ inventors respond to top tax rates?
In recent research (Akcigit, Baslandze, and Stantcheva 2015) we study the international migration responses of superstar inventors to top income tax rates for the period 1977-2003 using data from the European and US Patent offices, as well as from the Patent Cooperation Treaty […]. Our focus is on migration across eight technologically advanced economies: Canada, France, Germany, Great Britain, Italy, Japan, Switzerland, and the US. To abstract from capital and corporate taxes as much as possible, we restrict our attention to inventors who are company employees and are not the owners (‘assignees’) of their patents.
Superstar inventors are those in the top 1% of the distribution of citations-weighted patents in a given year and ‘stars’ are inventors who are just below superstars in terms of quality and are in the top 1-5% of the citations-weighted patent distribution.
From outside survey evidence, we know that superstar inventors are highly likely to be in the top tax bracket and, hence, directly subject to top tax rates. Stars or inventors of lower quality are much less likely to be in the top bracket. The top tax rate, which can also be viewed as a ‘success tax’ can also have either an indirect motivating or discouraging effect on inventors in general, even on those who are not yet in the top bracket.
There has is a strong and significant correlation between top tax rates and those inventors who remain in their home countries. The relation is strongest for superstar inventors. [Results] show that superstar inventors are highly sensitive to top tax rates. The elasticities imply that for a ten percentage point reduction of top tax rates from 50% to 40%, a country would be able to retain on average 3.3% more of its top 1% superstar inventors. This relation weakens as one moves down the quality distribution of inventors – the top 25-50% or the bottom 50% of inventors are no longer sensitive to top tax rates.
At the individual inventor level, we have developed a detailed model for location choice. This wasn’t easy for two reasons. First, location choices are clearly also driven by factors other than taxes – such as language, distance to one’s home country, and career concerns – for which we include controls. Second, inventors may earn different pre-tax wages in different countries. This is a counterfactual we cannot observe and have to control for through a detailed set of proxy measures.
The results highlight that superstar top 1% inventors are significantly affected by top tax rates when deciding where to live. For instance, our results suggest that, given a ten percentage point decrease in top tax rates, the average country would be able to retain 1% more domestic superstar inventors and attract 38% more foreign superstar inventors.
We also consider long-term mobility, defined as a one-way move abroad. It turns out that long-term mobility is still affected by taxes, but to a lesser extent. This seems to imply that there are some adjustment costs to moving that might prevent inventors from moving back once they leave due to higher taxes.
What is the influence of companies on inventors’ migration responses to taxes?
One would expect companies to have an important influence on the inventor’s decision to move abroad. For instance, working for a multinational company might facilitate an international move, both directly within the company and indirectly by providing international exposure. Depending on the bargaining power between employer and employee, the relocation decision might well be driven by the former rather than by the latter. In that case, and if the employer has other considerations than personal income tax, we would observe a dampened migration effect of taxes in the data. Note, nevertheless, that employers should take personal income taxes into account to some extent, if competition for superstar inventors forces them to pay higher wages as a compensation for higher taxes.
We find that inventors who have worked for a multinational company are more sensitive to tax differentials in their location choice. On the other hand, inventors whose company has a significant share of its innovative activity in a given country are less sensitive to the tax rate in that country. This seems to suggest that career concerns can outweigh tax considerations. It could also signal that companies with very geographically localised research and development activities will strongly prefer to keep their superstar inventors at the main research location and dissuade them from moving to lower tax countries.
The upshot of all of this is that labour, like capital, might be internationally mobile and respond to tax incentives. The loss of highly skilled agents such as inventors might entail significant economic costs, not just in terms of tax revenues lost but also in terms of reduced positive spillovers from inventors and, ultimately, less innovation in a country.
- Akcigit, U, S Baslandze and S Stantcheva (2015), “Taxation and the International Mobility of Inventors”, Working Paper 21024, National Bureau of Economic Research.