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Getting What You Pay For: The Case of Southern Economic Development

  • Rork, Jonathan C.
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    For the past fifty years, states of the American South have been competing with one another in order to recruit businesses to locate within their borders. While previous research has focused on assessing the short-term success of a tax-based recruitment plan, this paper addresses an important gap in the literature by looking at the long-term consequences that such a development policy can impose on a state’s industrial structure. By incorporating the role of firm mobility, this paper demonstrates that at the state level, the effect of lowering the corporate income tax on the factor intensity of a state’s manufacturing industries is theoretically ambiguous because it is dependent on the type of firm that finds it easier to move. Using historical data from 1957-1992 and a dynamic, partial adjustment model, this paper establishes an empirical link between low corporate tax rates and labor-intensive manufacturing industries, thereby suggesting that a low-tax policy is encouraging the immigration of footloose, laborintensive firms. Moreover, the paper finds that the labor used tends to be of an unskilled (production) nature, even as the national trend is to substitute away from unskilled labor into skilled labor.

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    File URL: http://purl.umn.edu/132308
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    Article provided by Mid-Continent Regional Science Association in its journal Journal of Regional Analysis and Policy.

    Volume (Year): 35 (2005)
    Issue (Month): 2 ()
    Pages:

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    Handle: RePEc:ags:jrapmc:132308
    Contact details of provider: Web page: http://jrap-journal.org/index.htm
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    1. Taylor, Leon, 1992. "Infrastructural competition among jurisdictions," Journal of Public Economics, Elsevier, vol. 49(2), pages 241-259, November.
    2. Gabe, Todd M., 2003. "Local Fiscal Policy and Establishment Growth," Journal of Regional Analysis and Policy, Mid-Continent Regional Science Association, vol. 33(1).
    3. King, I. & McAfee, R.P. & Welling, L., 1990. "Industrial Blackmail," Papers 130, Calgary - Department of Economics.
    4. Rork, Jonathan C., 2003. "Coveting Thy Neighbors' Taxation," National Tax Journal, National Tax Association, vol. 56(4), pages 775-87, December.
    5. Timothy C. Ford & Jonathan C. Rork & Bruce T. Elmslie, 2008. "Foreign Direct Investment, Economic Growth, and the Human Capital Threshold: Evidence from US States," Review of International Economics, Wiley Blackwell, vol. 16(1), pages 96-113, 02.
    6. Timothy J. Bartik, 1991. "Who Benefits from State and Local Economic Development Policies?," Books from Upjohn Press, W.E. Upjohn Institute for Employment Research, number wbsle, December.
    7. Coughlin, Cletus C & Terza, Joseph V & Arromdee, Vachira, 1991. "State Characteristics and the Location of Foreign Direct Investment within the United States," The Review of Economics and Statistics, MIT Press, vol. 73(4), pages 675-83, November.
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