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The effect of market-based sourcing on labor outcomes

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  • Welsch, Anthony

Abstract

This study examines how income tax sourcing rules affect business activity in U.S. states. As technology has enabled companies to provide services to consumers globally, a growing number of governments seek to tax service companies based on the customer location (“market-based sourcing”) rather than the location of the company’s labor and capital. Consistent with market-based sourcing reducing the tax cost of locating marginal labor in the state, I find that state adoption of market-based sourcing increases the total number of employees and total labor earnings in affected service industries by roughly 2 to 5 percent, after controlling for concurrent tax policy changes. I find indirect evidence that the effects are mostly attributable to business expansion rather than employee reallocation across states. Market-based sourcing does not seem to adversely affect state corporate tax revenues. This study provides timely insights for policymakers given increased adoption of market-based sourcing by U.S. states and related international proposals.

Suggested Citation

  • Welsch, Anthony, 2023. "The effect of market-based sourcing on labor outcomes," Journal of Public Economics, Elsevier, vol. 225(C).
    • Handle: RePEc:eee:pubeco:v:225:y:2023:i:c:s0047272723001482
    DOI: 10.1016/j.jpubeco.2023.104966
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    Cited by:

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    Keywords

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    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue

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