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Costly Migration and the Incidence of State and Local Taxes

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  • Jeffrey Thompson
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    Abstract

    This paper incorporates costly migration into the empirical literature on the incidence on wages of states and local taxes. The responsiveness of pre-tax wages to changes in state and local taxes (including income, sales and property taxes) is shown to vary by age and education. Using repeated cross-section and pseudo-panel regressions, the paper shows that the pre-tax wages of highly-educated and experienced workers are relatively unresponsive to tax changes. The wages of young and highly-educated workers – those facing the lowest costs of migration – are quite responsive. Results from migration regressions confirm that low migration cost households respond to state and local tax changes, while higher migration cost households do not. In addition, property taxes do not appear to be influencing shifts in pre-tax wages. Relatively small responses of both high and low-income workers suggest that redistributive effects of regressive or progressive state-level taxes are not undermined by labor supply shifts. In practice, however, states with relatively progressive tax structures also impose relatively high taxes on young and highly-educated workers, whose responsiveness is likely generating considerable deadweight losses and not contributing to redistribution in after-tax wages.

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    Bibliographic Info

    Paper provided by Political Economy Research Institute, University of Massachusetts at Amherst in its series Working Papers with number wp251.

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    Date of creation: 2011
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    Handle: RePEc:uma:periwp:wp251

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    1. Erhan Artu� & Shubham Chaudhuri & John McLaren, 2010. "Trade Shocks and Labor Adjustment: A Structural Empirical Approach," American Economic Review, American Economic Association, vol. 100(3), pages 1008-45, June.
    2. Harvey S. Rosen, 1986. "Introduction to "Studies in State and Local Public Finance"," NBER Chapters, in: Studies in State and Local Public Finance, pages 1-4 National Bureau of Economic Research, Inc.
    3. Wallace, Sally, 1993. "The effects of state personal income tax differentials on wages," Regional Science and Urban Economics, Elsevier, vol. 23(5), pages 611-628, November.
    4. Wildasin, D.E., 1992. "State Income Taxation with Mobile Labor," Papers 92-010, Indiana - Center for Econometric Model Research.
    5. Harvey S. Rosen, 1986. "Studies in State and Local Public Finance," NBER Books, National Bureau of Economic Research, Inc, number rose86-1, October.
    6. Quiggin, John, 2001. "Valuing Publicly Provided Services," The Economic Record, The Economic Society of Australia, vol. 77(238), pages 291-304, September.
    7. Gardes, Francois & Duncan, Greg J. & Gaubert, Patrice & Gurgand, Marc & Starzec, Christophe, 2005. "Panel and Pseudo-Panel Estimation of Cross-Sectional and Time Series Elasticities of Food Consumption: The Case of U.S. and Polish Data," Journal of Business & Economic Statistics, American Statistical Association, vol. 23, pages 242-253, April.
    8. Deaton, Angus, 1985. "Panel data from time series of cross-sections," Journal of Econometrics, Elsevier, vol. 30(1-2), pages 109-126.
    9. Andrew Leigh, 2005. "Can Redistributive State Taxes Reduce Inequality?," CEPR Discussion Papers 490, Centre for Economic Policy Research, Research School of Economics, Australian National University.
    10. Jon Bakija & Joel Slemrod, 2004. "Do the Rich Flee from High State Taxes? Evidence from Federal Estate Tax Returns," NBER Working Papers 10645, National Bureau of Economic Research, Inc.
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