Can State Taxes Redistribute Income?

37 Pages Posted: 16 Aug 2010

See all articles by Martin S. Feldstein

Martin S. Feldstein

National Bureau of Economic Research (NBER) (deceased); Harvard University (deceased)

Marian Vaillant

affiliation not provided to SSRN

Date Written: June 1994

Abstract

The evidence presented in this paper supports the basic theoretical presumption that state and local governments cannot redistribute income. Since individuals can avoid unfavorable taxes by migrating to jurisdictions that offer more favorable tax conditions, a relatively unfavorable tax will cause gross wages to adjust until the resulting net wage is equal to that available elsewhere. The current empirical findings go beyond confirming this long-run tendency and show that gross wages adjust rapidly to the changing tax environment. Thus, states cannot redistribute income for a period of even a few years. The adjustment of gross wages to tax rates implies that a more progressive tax system raises the cost to firms of hiring more highly skilled employees and reduces the cost of lower skilled labor. A more progressive tax thus induces firms to hire fewer high skilled employees and to hire more low skilled employees. Since state taxes cannot alter net wages, there can be no trade- off at the state level between distribution goals and economic efficiency. Shifts in state tax progressivity, by altering the structure of employment in the state and distorting the mix of labor inputs used by firms in the state, create deadweight efficiency losses without achieving any net redistribution of income.

Suggested Citation

Feldstein, Martin S. and Vaillant, Marian, Can State Taxes Redistribute Income? (June 1994). NBER Working Paper No. w4785, Available at SSRN: https://ssrn.com/abstract=1659530

Martin S. Feldstein (Contact Author)

National Bureau of Economic Research (NBER) (deceased)

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Marian Vaillant

affiliation not provided to SSRN

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