It turns out that, according to this WSJ article, Laffer may have been correct when he said a state that raises taxes on the rich often finds it has fewer revenues rather than more, because the rich have their methods of getting around that.
The state of Maryland has discovered that its nifty idea of making up for a shortfall by raising taxes on millionaires didn’t quite pan out as planned:
One year later, nobody’s grinning. One-third of the millionaires have disappeared from Maryland tax rolls. In 2008 roughly 3,000 million-dollar income tax returns were filed by the end of April. This year there were 2,000, which the state comptroller’s office concedes is a “substantial decline.” On those missing returns, the government collects 6.25% of nothing. Instead of the state coffers gaining the extra $106 million the politicians predicted, millionaires paid $100 million less in taxes than they did last year — even at higher rates.
No one yet knows exactly what happened. Some of these millionaires may simply have lost a lot of money in the recession. But, as the WSJ article points out, that’s something states must factor in when they rely on sticking it to the rich when things are good; they might find an unexpected deficit when times get bad:
Progressive tax rates create mountains of cash during good times that vanish during recessions. For evidence, consult California, New York and New Jersey.
Of course, it’s possible that the state would have lost even more money without the tax hike. One way to test this would be to compare the missing millionaire mass of a state such as Maryland (one that recently raised the taxes on millionaires) to another state that failed to do so, and see if the percentages of lost millionaires are similar or different. My guess is that Maryland’s loss would be significantly higher—anyone out there want to take up the challenge of doing the research?
There’s little question that at least some of those Maryland millionaires probably took up legal residence in more tax-friendly states, although the exact number of refugees is unknown. Another part of the loss may be accounted for by more tax evasion and even outright fraud, although the extent of that would be extraordinarily difficult to estimate as well. But millionaires don’t usually get to be millionaires by being dumb about making and keeping money.