Who's Flying Now? (And Why?)

Ted Nesi posted an interesting graphic from the Tax Foundation that shows that:

Rhode Island posted the 18th-fastest growth in high-income taxpayers between 1999 and 2009.

While the total number of Rhode Island taxpayers grew by just 4% during that period, the number with adjusted gross incomes above $200,000 jumped 63%, for a net gain of 58.9% at the top end, the biggest in New England.

This prompted the NEA's Pat Crowley to chime in with a by-now familiar bit of rhetoric:

Vindication once again. The “flight of the earls” myth that was used as a justification to cut taxes on the elite in the middle part of the last decade is, once again, shown to be untrue.

Well, as I responded, whether you believe in the "flight of the earls" theory or not (and setting aside that it's a bit of a strawman set up by Crowley anyway), the Tax Foundation chart and data doesn't really prove or disprove it at all because the data only compares the beginning and end of a time period in which RI cut the capital gains tax and enacted the flat tax (around 2006), which were aimed at keeping/attracting high earners. It’s just as possible that the "earls" were "flying" until the 2006 reforms and then we saw an influx. We’d have to see yearly data to more accurately determine causation/correlation. So let's do that.

First, even though what follows is a more robust way to look at the trend of higher income taxpayer migration, it is by no means comprehensive. It doesn't take inflation into account (though, as the Tax Foundation points out, their percentages are relative so that affect is mitigated in their analysis), which is why the relative increase in $200K wage-earning households when comparing 1999 to 2010 may be exaggerated. Additionally, the multitude of effects that the economic recession has had on wage-earners aren't adequately accounted for in this simplified manner.

I turned to the IRS's Statistics on Income data from 1999-2010 and tallied up the number of + $200K taxpayers. (Yes, I thought I'd look at 2010, too).

Further, thanks to a timeline provided by Justin, we can compare the implementation of tax policies that were meant to impact high wage earners.

2002: capital gains tax phase-out passed to begin in 2007
2006: flat tax reduction begins
2007: capital gains tax phase-out begins with 2/3 reduction; then it's frozen
2010: capital gains tax increased to personal income level
2011: Flat tax rate reduction frozen

Keeping these dates in mind, let's look at the effects on + $200K wage-earning households. In 2000 there were 9,013 such taxpayers and this dropped to 8,259 in 2001, which, if memory serves, may have helped serve as an impetus for the tax policies that followed.

In 2002, when the capital gains tax phase-out was passed (to go into effect in 2007), the number of + $200K wage-earners went up to 8,500. From 2003 thru 2005, the numbers continued to increase, from 9,252 to 10,798 in 2004 to 12,376 in 2005. In 2006 the flat tax reduction begins and the climb continued to 13,387. In 2007, the capital gains tax phase-out begins with a 2/3 reduction of the previous level and the total + $200K wage-earning households climbed to 14,737. That year the General Assembly voted to freeze the capital gains tax (so the other 1/3 reduction did not occur) and the number dropped to 13,475 in 2008 and 12,416 in 2009. In 2009, the capital gains tax was set to be increased by matching it to personal income level in 2010. The number of households earning over $200K dropped to 11,117 in 2010. In 2011 the Flat tax rate reduction was frozen and we'll have to wait to see what happened.

When looking at the data for both "upper" middle-class and (I guess) "regular" middle-class, it looks like there is no relation between these tax policies and the number of wage earners.

For myself, I've been more of a "flight of the squires" kind of guy than "flight of the earls", believing that it's the middle-class who is suffering--and fleeing Rhode Island--more than the wealthy. As the above charts show, maybe that's wrong.

What I think this does show, however, is that there is a link between capital gains and flat tax policies and the impact they have on the number of high wage earners. During the time that these taxes were reduced, the number of + $200K wage-earners increased. After these taxes were frozen or raised, the number of + $200K wage-earners decreased.

ADDENDUM: The freeze/increase occurred before the economic downturn of 2008/2009 and, it looks like, the "earls" were already fleeing. It also looks like a lot of the "earls" became, um, "counts"(?), as the number of upper middle class wage earners seems to to be continually increasing, perhaps because some earls stayed in RI but dropped an income category. Also, the upper middle class is also being continually refreshed by regular middle class wage-earners moving up. In other words, it's important to remember that these classifications don't necessarily cover the same households.