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State business taxes and investment: state-by-state simulations

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Author Info

  • Robert S. Chirinko
  • Daniel J. Wilson

Abstract

This article develops a framework for simulating the effects of state business taxes on state investment and output. Our simulations provide the predicted increase in investment—both in equipment and structures (E&S) and in research and development (R&D)—and the predicted increase in output for a given state resulting from a specified change in one of its three tax policies—the E&S investment tax credit, the R&D tax credit, or the corporate income tax. The simulations depend on a set of formulas linking economic parameters and state data to investment and output, all of which are reported in this article. We report results, based on our preferred set of parameters, for each of the 48 contiguous states. We also discuss alternative parameter values and explore the resulting sensitivity of predicted changes in state investment and output. Finally, we describe a simple web tool that we have made available online (www.frbsf.org/csip/taxapp.php) that allows users to insert their own preferred parameter values and simulate the economic effects for the state and tax policy of their choosing.

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File URL: http://www.frbsf.org/economic-research/publications/economic-review/2010/er13-28.pdf
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Bibliographic Info

Article provided by Federal Reserve Bank of San Francisco in its journal Economic Review.

Volume (Year): (2010)
Issue (Month): ()
Pages: 13-28

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Handle: RePEc:fip:fedfer:y:2010:p:13-28

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Keywords: Taxation ; State finance;

References

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  1. Rosanne Altshuler & Timothy J. Goodspeed, 2002. "Follow the Leader? Evidence on European and U.S. Tax Competition," Departmental Working Papers 200226, Rutgers University, Department of Economics.
  2. Altshuler, Rosanne & Auerbach, Alan J, 1990. "The Significance of Tax Law Asymmetries: An Empirical Investigation," The Quarterly Journal of Economics, MIT Press, vol. 105(1), pages 61-86, February.
  3. Devereux, Michael P. & Lockwood, Ben & Redoano, Michela, 2008. "Do countries compete over corporate tax rates?," Journal of Public Economics, Elsevier, vol. 92(5-6), pages 1210-1235, June.
  4. Chirinko, Robert S. & Wilson, Daniel J., 2008. "State investment tax incentives: A zero-sum game?," Journal of Public Economics, Elsevier, vol. 92(12), pages 2362-2384, December.
  5. Auerbach, Alan J, 1983. "Taxation, Corporate Financial Policy and the Cost of Capital," Journal of Economic Literature, American Economic Association, vol. 21(3), pages 905-40, September.
  6. Robert S. Chirinko & Daniel J. Wilson, 2009. "A state level database for the manufacturing sector: construction and sources," Working Paper Series 2009-21, Federal Reserve Bank of San Francisco.
  7. Chirinko, Robert S. & Mallick, Debdulal, 2011. "The elasticity of derived demand, factor substitution, and product demand: Corrections to Hicks' formula and Marshall's Four Rules," Labour Economics, Elsevier, vol. 18(5), pages 708-711, October.
  8. Bob Chirinko & Daniel J. Wilson, 2007. "Tax competition among U.S. states: racing to the bottom or riding on a seesaw?," Working Paper Series 2008-03, Federal Reserve Bank of San Francisco.
  9. Michael Overesch & Johannes Rincke, 2011. "What Drives Corporate Tax Rates Down? A Reassessment of Globalization, Tax Competition, and Dynamic Adjustment to Shocks," Scandinavian Journal of Economics, Wiley Blackwell, vol. 113(3), pages 579-602, 09.
  10. Daniel Wilson, 2006. "The mystery of falling state corporate income taxes," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue dec8.
  11. Federico Revelli, 2002. "Testing the taxmimicking versus expenditure spill-over hypotheses using English data," Applied Economics, Taylor & Francis Journals, vol. 34(14), pages 1723-1731.
  12. Robert S. Chirinko & Steven M. Fazzari, 1993. "Economic fluctuations, market power, and returns to scale: evidence from firm-level data," Research Working Paper 93-06, Federal Reserve Bank of Kansas City.
  13. Daniel J. Wilson, 2009. "Beggar Thy Neighbor? The In-State, Out-of-State, and Aggregate Effects of R&D Tax Credits," The Review of Economics and Statistics, MIT Press, vol. 91(2), pages 431-436, May.
  14. Chang, Yongsung & Hornstein, Andreas & Sarte, Pierre-Daniel, 2009. "On the employment effects of productivity shocks: The role of inventories, demand elasticity, and sticky prices," Journal of Monetary Economics, Elsevier, vol. 56(3), pages 328-343, April.
  15. Masayoshi Hayashi & Robin Boadway, 2001. "An empirical analysis of intergovernmental tax interaction: the case of business income taxes in Canada," Canadian Journal of Economics, Canadian Economics Association, vol. 34(2), pages 481-503, May.
  16. Hans-Werner Sinn, 1991. "The Vanishing Harberger Triangle," NBER Working Papers 3225, National Bureau of Economic Research, Inc.
  17. Heyndels, Bruno & Vuchelen, Jef, 1998. "Tax Mimicking Among Belgian Municipalities," National Tax Journal, National Tax Association, vol. 51(n. 1), pages 89-101, March Cit.
  18. Jane G. Gravelle, 1994. "The Economic Effects of Taxing Capital Income," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262071584, January.
  19. Domowitz, Ian & Hubbard, R Glenn & Petersen, Bruce C, 1987. "Oligopoly Supergames: Some Empirical Evidence on Prices and Margins," Journal of Industrial Economics, Wiley Blackwell, vol. 35(4), pages 379-98, June.
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Citations

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Cited by:
  1. Timothy J. Bartik & Kevin Hollenbeck, 2012. "An Analysis of the Employment Effects of the Washington High Technology Business and Occupation (B&O) Tax Credit," Upjohn Working Papers and Journal Articles 12-187, W.E. Upjohn Institute for Employment Research.
  2. Timothy J. Bartik & George A. Erickcek, 2012. "Simulating the Effects of Michigan's MEGA Tax Credit Program on Job Creation and Fiscal Benefits," Upjohn Working Papers and Journal Articles 12-185, W.E. Upjohn Institute for Employment Research.

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