State Taxes and Spatial Misallocation
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 responds to changes in state taxes. We find that tax dispersion leads to aggregate losses and the potential losses from even greater tax dispersion can be large. A government-spending-constant elimination of spatial dispersion in state taxes (which account for 4% of GDP) would increase worker welfare by 0.2%, while doubling spatial tax dispersion would reduce worker welfare by 0.4%.
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This paper was revised on December 6, 2016
Document Object Identifier (DOI): 10.3386/w21760