millionaires

Millionaire taxes hurt the masses, from Newark to Paris

July 17, 2012: 5:00 AM ET

Leaders around the world want the rich to keep giving. But when the wealthy get tired of getting tapped, guess who gets stuck with the tab?

By Nina Easton, senior editor-at-large

FORTUNE -- When New Jersey governor Chris Christie heard British Prime Minister David Cameron invite France's wealthy to decamp to England to escape a proposed 75% tax rate, he felt something akin to déjà vu. Every day top executives of Johnson & Johnson (JNJ), Merck (MRK), and other companies commute from their homes in Pennsylvania to offices in Christie's state, saving roughly two-thirds on their state income tax bill -- and costing New Jersey's treasury $50 million, by one estimate.

Astute U.S. governors have long understood that capital is fickle, and millionaires are mobile. High top tax rates are the equivalent of a DO NOT ENTER sign for many of the wealthy and would-be wealthy -- those entrepreneurs building companies and bringing jobs. "That's irrefutable," Christie tells Fortune, "and common sense." In twice vetoing his own legislature's millionaire surtax plans, Christie cited a Boston College study showing that New Jersey lost $70 billion in wealth between 2004 and 2008 under a similar tax.

Britain's Cameron likewise gets the game. While liberals say this is a matter of fairness, Cameron sees uncompetitive tax rates driving out enterprising citizens -- and with them, their cash. "If the French go ahead with a 75% top rate of tax," he proclaimed at the G-20 Summit, "we will roll out the red carpet and welcome more French businesses to Britain, and they will pay taxes in Britain and that will pay for our health service and our schools and everything else."

The liberal Guardian newspaper reacted to Cameron's invitation by accusing him of turning the U.K. into a haven for tax dodgers. More likely, the Prime Minister had in mind human nature -- and a recent study showing that after the previous Labour government ratcheted the top rate from 40% to 45% to 50%, there was an exodus of high-income Britons to countries like Switzerland. Revenue gains were minimal. Cameron's conservative government has since reduced the top rate to 45%.

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Nevertheless, French President François Hollande has some company among Democratic governors in the U.S. facing strapped budgets. Maryland's Martin O'Malley is raising taxes again, this time on the state's top 14% of earners. O'Malley rejects claims of critics who say he is driving out well-to-do residents. But the savings to those who move across the Potomac River to Virginia are substantial: from $6,000 for a $250,000-income household to $28,000 for a joint-earner $1 million household with two children -- roughly equal to the annual payments on a $700,000 home in Alexandria, according to the Tax Foundation.

In California, where the top 1% of earners already account for half of state income tax revenues, Gov. Jerry Brown has signed on to a November ballot initiative, backed by labor, that raises the top rate. It comes on top of an existing 1% surtax that kicks in at $1 million.

The squeeze-the-rich crowd insists there's no solid evidence that high tax rates prompt migration. People move for all sorts of reasons: jobs, weather, family. But "people who migrate from one state to another for tax reasons generally don't announce it," notes the Tax Foundation's Scott Hodge. And it's widely accepted that tax rates affect the location decisions of corporations: Canada's Stephen Harper slashed his country's corporate tax rate to attract business, while U.S. executives cite our rate -- the highest in the world -- as one reason for leaving some $1.2 trillion in profits overseas.

But taxes on millionaires will always be cheap and easy politics, predictably drawing strong support in opinion polls. "Taxes you don't pay are always popular," says Christie, "but the story doesn't stop there. There are never enough rich people to tax. After they tax these folks, they're coming after you."

France's Socialist Party leader doesn't mask his disdain for the wealthy, and drastically hiking the top rate to 75% from 41% for those making more than 1 million euros means confiscating more of their earnings. So Hollande is probably just as happy to say au revoir to them. Do American governors really want to speak that language?

This story is from the July 23, 2012 issue of Fortune.

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