The economic impact of higher top tax rates was one of the more contentious themes of the recent general election. The advocates of higher marginal tax rates for top earners dismissed the idea that an increase in taxes could lead some of the most valuable wealth creators to move abroad, arguing that people do not make relocation decisions based on economic considerations, despite the low labour mobility barriers in advanced economies. Hence, people are not as mobile as capital, and the same tax incentives that can be applied to prevent capital outflows are not needed to prevent brain drain. The counterargument that higher taxes on top earners could lead to an exodus of talent has often been based on anecdotal evidence of isolated cases, because a lack of international data has led to a scarcity of rigorous evidence. Emerging research, however, offers support to the argument that the most valuable economic agents do mirror capital in terms of mobility.

A recent Danish study found a strong correlation between a temporary reduction in the top tax rates on high-income foreigners and the inflow of migrants. Similarly, another study showed that highly paid football stars reacted to top tax rates when choosing where to work. However, it is difficult to extrapolate estimates for other professions from these two studies alone. Recent extensive research extended the previous studies on taxes and the mobility of high-value economic agents. The study focused on the international migration responses of ‘superstar inventors’ to top income tax rates for the period of 1977-2003, using data from the European and US patent offices, as well as the Patent Cooperation Treaty. The research studied migration of inventors across eight technologically advanced economies: Canada, France, Germany, Great Britain, Italy, Japan, Switzerland, and the US.

Although inventors do not receive the same attention from the policy makers and the media as bankers and entrepreneurs, they are, of course, at the root of innovation in the economy.  Inventors act as potential drivers of technological progress and important contributors to a county’s competitive advantage. Data gleaned by the authors show that many superstar inventors in the top percentile of patent citations are also highly successful migrants. They tend to be more mobile than more ‘average’ inventors, at least as measured by the number of patent citations, and the superstar inventors are highly likely to be in the top tax bracket and subject to changes in the top marginal rate of tax.

The research finds that superstar inventors are highly sensitive to top tax rates, and that there is a strong correlation between the top tax rates and proportion of those inventors who remain in their home countries. For the macro-level, the model shows that for a ten-point reduction in the top tax rate from 50% to 40%, a country could be able to retain on average 3.3% more of its top 1% superstar inventors.

To measure microeconomic effects, the researchers developed a model that accounted for non-tax factors such as language, distance to one’s home country, and general career prospects. The results indicate that top inventors are strongly affected by tax rates when deciding where to live. The researchers conclude that given a ten percentage point decrease in top tax rates, an average country could retain 1% more of its domestic superstar inventors and attract 38% more foreign superstar inventors.

The table below shows how many more domestic top 1% superstar inventors the countries could retain and how many more foreign superstar investors they could attract with a ten-percentage point reduction in the top tax rate in the year 2000.

This research makes an important contribution to the emerging evidence that highly skilled labour, like capital, may be internationally mobile and sensitive to tax incentives. The loss of talented economic agents such as inventors may result in significant economic costs including the loss of innovative capability of a country. The authors point out that more research is required to quantify the magnitude of this aspect of the cost of taxation, and once the migration responses of high earners to taxation are better understood, one should think about possible policy implications.