It is likely that taxes at all levels will increase to pay for the massive spending that has taken place. Taxing governments should be wary of raising taxes too far, too fast. According to 2007 IRS statistics the top 1% of U.S. Taxpayers paid 40.4% of federal individual income taxes. At some point, further increases of tax burden on the same individuals will affect behavior. As taxpayers react to tax increases, they may leave a state or even a country for more tax friendly environments.
The Wall Street Journal ran an editorial in May 2009 describing the situation in Maryland. In 2008 Maryland enacted a "millionaire's tax." The legislature increased the marginal income tax rate to 6.25% on incomes of more than $1 million. Since cities like Baltimore and Bethesda also impose income taxes, the state and local combined rates could be as high as 9.45%. The millionaire's tax was estimated to bring in an additional $328 million in revenue over three years to the state coffers. In 2008 roughly 3,000 income tax returns with a million or more dollars of reported income were filed by Maryland residents. In 2009, there were only 2,000. The revenue from this groups of taxpayers was down $100 million (not up as predicted). The net result is that state of Maryland actually collected less tax from the millionaires by raising the tax rate, instead of the increase they projected. The WSJ surmises that Maryland's millionaire population fell by a third. They changed which state they claim as their legal residence. That's why the legislation is referred to as the "Get Out of Maryland Tax Act."
Rochester New York billionaire Tom Golisano made a highly publicized move to Naples, Florida because of high taxes in New York State. Golisano said the new New York State budget would result in his paying $5 million in income tax to New York State. In Florida he will pay zero income tax. Read his piece on "Why I'm Leaving New York."
Toronto attorneys Lesperance & Associates, who advise wealthy U.S. citizens on the "how to" of expatriation, have created a video called "Flight of the Golden Geese." It is about Goldie, a goose who lays golden eggs. (You can see it here.) In the video, Goldie alone was covering over 40% of the cost of the farm. The farmer said he needed more eggs. Goldie responded that the other animals should contribute, as well. The other animals called Goldie names - greedy, disloyal, selfish and disloyal to the farm. The Farmer said "Let's vote on it. Everybody in favor of Goldie giving more eggs raise your hoof, paw, or wing." What happened to the goose who laid the golden eggs? She left the farm, flying to another country where she didn't have to give up so many of her golden eggs to the farmer. As did Goldie, some individuals will choose to move to lower-tax countries.
Concerned about crushing estate, capital gains, and income taxes as well as personal security risks and the threat of litigation in the U.S.; wealthy U.S. citizens are looking at other countries. Other U.S. citizens who we would not classify as "wealthy" are looking to move to lower-tax jurisdictions as well. It is happening at such a rate that Congress enacted the Heroes Earnings Assistance and Relief Tax Act of 2008 (the "HEART Act") which contains provisions to deter high net worth U.S. citizens or long term residents from avoiding payment of U.S. taxes by imposing an immediate exit tax on both the U.S. and foreign assets of individuals who relinquish their citizenship or who give up their green cards. How wealthy? The exit tax applies if you meet on of these three criteria: (1) for the period of five taxable years ending before the year of expatriation the individual has an average annual income tax liability of at least $145,000, (2) a net worth at the date of expatriation of at least $2 million, or (3) the individual would have failed to satisfy all applicable U.S. tax obligations for the five tax years before the year of expatriation.
Before you decide to take flight, there are things to consider. What about your health insurance? Medicare only pays in the U.S. - will your supplemental coverage cover you in the country where you are relocating? Will you be able to get the immigration status you need in the new country Will your retirement income support the lifestyle you want in the new country? What are the estate tax considerations?
Likewise, taxing authorities should consider the ability of geese who lay golden eggs to assume ever-increasing tax burdens.