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Tax Burden and the Mismeasurement of State Tax Policy

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  • W. Robert Reed

    (University of Canterbury, New Zealand)

  • Cynthia L. Rogers

    (University of Oklahoma)

Abstract

Tax Burden, defined as the ratio of total tax revenues over personal income, is frequently used to measure state tax policy. The authors analyze the empirical relationship between changes in Tax Burden and changes in tax policies from 1987 to 2000 using states’ forecasts of revenue impacts of new tax legislation. Their two major findings have important implications. First, they demonstrate that income-induced, nontax policy changes are a significant determinant of changes in Tax Burden. These income effects are likely to cause misinterpretation when Tax Burden is used as a variable in economic growth regressions. Second, they estimate that approximately half of the total variation in Tax Burden is due to changes in nontax policy factors. This finding quantifies the extent of the “mismeasurement†problem that has been discussed, but not analyzed, in previous literature. In concluding, the authors promote the use of alternative approaches for estimating the economic effects of taxes.

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Bibliographic Info

Article provided by in its journal Public Finance Review.

Volume (Year): 34 (2006)
Issue (Month): 4 (July)
Pages: 404-426

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Handle: RePEc:sae:pubfin:v:34:y:2006:i:4:p:404-426

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Keywords: tax policy; fiscal policy; Tax Burden; state economic development; tax rates;

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References

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  17. Zsolt Becsi, 1996. "Do state and local taxes affect relative state growth?," Economic Review, Federal Reserve Bank of Atlanta, issue Mar, pages 18-36.
  18. Yamarik, Steven, 2000. "Can tax policy help explain state-level macroeconomic growth?," Economics Letters, Elsevier, vol. 68(2), pages 211-215, August.
  19. Grier, Kevin B. & Tullock, Gordon, 1989. "An empirical analysis of cross-national economic growth, 1951-1980," Journal of Monetary Economics, Elsevier, vol. 24(2), pages 259-276, September.
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Cited by:
  1. W. Robert Reed & Cynthia L. Rogers & Mark Skidmore, 2008. "On Estimating Marginal Tax Rates and Tax Progressivities for U.S. States," Working Papers in Economics 08/17, University of Canterbury, Department of Economics and Finance.
  2. Rogers, Cynthia L. & Wu, Chen, 2012. "Employment by foreign firms in the U.S.: Do state incentives matter?," Regional Science and Urban Economics, Elsevier, vol. 42(4), pages 664-680.

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