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Tax Interdependence in the U.S. States

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State governments finance their expenditures with multiple tax instruments, so when collec-tions from one source decline, they are typically compensated by greater revenues from other sources. This paper addresses the important question of the extent to which personal and cor-porate income taxes are used to compensate for sales tax ‡uctuations within the U.S. states. The results show that one percent increase in the sales tax rate is associated with a half and a third percent decrease in the personal and corporate income tax rates respectively. In terms of tax revenues per capita, the results show that a one percent increase in the sales tax revenue per capita is associated with a 3 percent and a 0.9 percent decrease in the corporate and personal income tax revenue per capita respectively. On average then, an exogenous reduction of $4.5 in the sales tax revenue per capita is compensated, ceteris paribus, with an increase of either $3.4 in the collections per capita from corporate taxes or $3.6 in the ones from personal income taxes.

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Paper provided by Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines in its series ILADES-Georgetown University Working Papers with number inv151.

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Handle: RePEc:ila:ilades:inv151

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  1. Alan J. Auerbach & James R. Hines Jr., 2001. "Taxation and Economic Efficiency," NBER Working Papers 8181, National Bureau of Economic Research, Inc.
  2. Mirrlees, J. A., 1976. "Optimal tax theory : A synthesis," Journal of Public Economics, Elsevier, vol. 6(4), pages 327-358, November.
  3. Diamond, P. A., 1975. "A many-person Ramsey tax rule," Journal of Public Economics, Elsevier, vol. 4(4), pages 335-342, November.
  4. Craig Brett & Joris Pinkse, 2000. "The determinants of municipal tax rates in British Columbia," Canadian Journal of Economics, Canadian Economics Association, vol. 33(3), pages 695-714, August.
  5. Samuelson, P. A., 1986. "Theory of optimal taxation," Journal of Public Economics, Elsevier, vol. 30(2), pages 137-143, July.
  6. Kesselman, Jonathan R, 1993. "Evasion Effects of Changing the Tax Mix," The Economic Record, The Economic Society of Australia, vol. 69(205), pages 131-48, June.
  7. Atkinson, A. B. & Stiglitz, J. E., 1972. "The structure of indirect taxation and economic efficiency," Journal of Public Economics, Elsevier, vol. 1(1), pages 97-119, April.
  8. Alan J. Auerbach, 1986. "The Theory of Excess Burden and Optimal Taxation," NBER Working Papers 1025, National Bureau of Economic Research, Inc.
  9. Peter A. Diamond & J. A. Mirrlees, 1968. "Optimal Taxation and Public Production," Working papers 22, Massachusetts Institute of Technology (MIT), Department of Economics.
  10. Arnold Harberger, 1964. "Taxation, Resource Allocation, and Welfare," NBER Chapters, in: The Role of Direct and Indirect Taxes in the Federal Reserve System, pages 25-80 National Bureau of Economic Research, Inc.
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