Ed Glaeser has a post over at Times' Economix blog that makes a couple of nice points about state taxes, in response to New York's decision to impose a "temporary Personal Income Tax Surcharge" on taxpayers earning more than $500,000 a year.
It is perfectly consistent to be in favor of soaking the rich at the national level but to be against such policies at the state or local level. If New York taxes its financiers heavily, it can be sure that Greenwich will grow.
[...] The problem with a tax on millionaires is that the economic success of a region is closely tied to its ability to attract highly skilled workers. The figure shows that a 10 percent increase in the share of a metropolitan area's adult population with college degrees in 1980 is associated with a 7 percent increase in that area's income between 1980 and 2000.
Any policy that makes a place less attractive for workers with high skill and education levels, including millionaire's taxes, carries risks since localities that are dependent on skilled workers for long-run economic success. If all states simultaneously taxed the rich, then this would be essentially a national policy with little geographic consequences, but if some states raise taxes more than others, then economic activity will respond to those taxes.
The basic point is that, when taxes vary across small geographic reasons, it's relatively easy to relocate to the place with the lower tax. And, indeed, this competition is surely one reason why state taxes -- even in the most progressive states -- are far less progressive than their federal counterparts. In fact, they're just regressive (chart stolen shamelessly from Ezra Klein):
The one thing I would add to Glaeser's analysis is that economics can't really tell us much about the optimal number of millionaires we want to have living in a city. It might tell you about the optimal number for revenue purposes, but that's not the same thing. As Glaeser says, "Taxing the rich always has costs, like reduced entrepreneurship and hours of work, but those costs may be worth paying to achieve greater equality."
I completely agree. And one of the costs might be geographic relocation. As the Times of London reminds us, this happens on the national level too. But that doesn't mean redistribution is never worth a few millionaires packing their bags for the Cayman Islands.