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Title: The Effect of State Taxes on the Geographical Location of Top Earners: Evidence from Star Scientists

Author(s): Enrico Moretti and Daniel J Wilson

Publication Date: May 2015

Keyword(s): economic geography, innovation and taxes

Programme Area(s): International Trade and Regional Economics, Labour Economics and Public Economics

Abstract: Using data on the universe of U.S. patents filed between 1976 and 2010, we quantify how sensitive is migration by star scientist 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 scientistsí 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 stateís formula for apportioning multi-state income. No effect is found in states that apportion income based only on sales (in which case laborís 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.

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Bibliographic Reference

Moretti, E and Wilson, D. 2015. 'The Effect of State Taxes on the Geographical Location of Top Earners: Evidence from Star Scientists'. London, Centre for Economic Policy Research. http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=10600