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State Taxes and Spatial Misallocation

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  • Pablo D. Fajgelbaum
  • Eduardo Morales
  • Juan Carlos Suárez Serrato
  • Owen M. Zidar

Abstract

We study state taxes as a potential source of spatial misallocation in the United States. We build a spatial general equilibrium framework that incorporates salient features of the U.S. state tax system, and use changes in state tax rates between 1980 and 2010 to estimate the model parameters that determine how worker and firm location respond to changes in state taxes. We find that heterogeneity in state tax rates leads to aggregate losses. Harmonizing state taxes increases worker welfare by 0.5 percent if government spending is held constant, and by 1.0 percent if government spending responds endogenously. Harmonization of state taxes within Census regions achieves most of these gains. We also use our model to study the general equilibrium effects of recently implemented and proposed tax reforms.

Suggested Citation

  • Pablo D. Fajgelbaum & Eduardo Morales & Juan Carlos Suárez Serrato & Owen M. Zidar, 2015. "State Taxes and Spatial Misallocation," NBER Working Papers 21760, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:21760
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    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • R13 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General Equilibrium and Welfare Economic Analysis of Regional Economies

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