Working Paper: NBER ID: w21760
Authors: Pablo D. Fajgelbaum; Eduardo Morales; Juan Carlos Suárez Serrato; Owen M. Zidar
Abstract: We study state taxes as a potential source of spatial misallocation in the United States. We build a spatial general equilibrium framework that incorporates salient features of the U.S. state tax system, and use changes in state tax rates between 1980 and 2010 to estimate the model parameters that determine how worker and firm location respond to changes in state taxes. We find that heterogeneity in state tax rates leads to aggregate welfare losses. In terms of consumption equivalent units, harmonizing state taxes increases worker welfare by 0.6 percent if government spending is held constant, and by 1.2 percent if government spending responds endogenously. Harmonization of state taxes within Census regions achieves most of these gains. We also use our model to study the general equilibrium effects of recently implemented and proposed tax reforms.
Keywords: State Taxes; Spatial Misallocation; Welfare; General Equilibrium
JEL Codes: E6; H71; R13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| heterogeneity in state tax rates (H73) | aggregate welfare losses (E10) |
| harmonizing state taxes (H71) | worker welfare (J38) |
| eliminating the SALT deduction (H20) | welfare (I38) |
| eliminating the SALT deduction (H20) | aggregate real GDP (E10) |
| state tax dispersion (H73) | heterogeneous effects across states (H73) |
| high income and tax rates (H24) | suffer more from tax reforms (H29) |
| after-tax real wages and profits (E25) | location decisions (R32) |