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The Poverty of States: Do State Tax Policies Affect State Labor Productivity?

  • McPhail, Joseph E.
  • Orazem, Peter
  • Singh, Rajesh

There are substantial differences in output per worker across states that have persisted over time.� This study demonstrates that in the context of a neoclassical growth model, differences in marginal tax rates on income from capital investment, capital ownership, and consumption will lead to persistent differences in labor productivity across states.� These theoretical predictions are supported, using data on state marginal tax rates and output per worker over the 1977-2008 sample period.� Over that period, the mix of state tax policies has led to a reduction in labor productivity averaging almost 2.8% per year.� The implied adverse effect of tax distortions on labor productivity across states is substantial, varying from -1.6% in Nevada to -3.9% in New York.� On the other hand, government expenditure policies explain none of the variation in labor productivity across states or time.� Results allow rankings of state tax structures by their adverse impacts on productivity and by their efficiency at raising revenue relative to lost productivity.�

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Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 31552.

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Date of creation: 26 May 2010
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Handle: RePEc:isu:genres:31552
Contact details of provider: Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
Phone: +1 515.294.6741
Fax: +1 515.294.0221
Web page: http://www.econ.iastate.edu
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