NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

State Taxes and Spatial Misallocation

Pablo D. Fajgelbaum, Eduardo Morales, Juan Carlos Suárez Serrato, Owen M. Zidar

NBER Working Paper No. 21760
Issued in November 2015, Revised in May 2018
NBER Program(s):Economic Fluctuations and Growth, International Finance and Macroeconomics, International Trade and Investment, Public Economics, Productivity, Innovation, and Entrepreneurship

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 losses. Harmonizing state taxes increases worker welfare by 0.5 percent if government spending is held constant, and by 1.0 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.

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Document Object Identifier (DOI): 10.3386/w21760

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