State Taxes and Spatial Misallocation

91 Pages Posted: 30 Nov 2015 Last revised: 17 Jun 2021

See all articles by Pablo D. Fajgelbaum

Pablo D. Fajgelbaum

University of California, Los Angeles (UCLA)

Eduardo Morales

Princeton University - Department of Economics

Juan Carlos Suárez Serrato

Duke University - Department of Economics; National Bureau of Economic Research (NBER)

Owen M. Zidar

University of Chicago - Booth School of Business

Date Written: November 2015

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 welfare losses. In terms of consumption equivalent units, harmonizing state taxes increases worker welfare by 0.6 percent if government spending is held constant, and by 1.2 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

Fajgelbaum, Pablo D. and Morales, Eduardo and Suárez Serrato, Juan Carlos and Zidar, Owen M., State Taxes and Spatial Misallocation (November 2015). NBER Working Paper No. w21760, Available at SSRN: https://ssrn.com/abstract=2696826

Pablo D. Fajgelbaum (Contact Author)

University of California, Los Angeles (UCLA) ( email )

405 Hilgard Avenue
Box 951361
Los Angeles, CA 90095
United States

Eduardo Morales

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

Juan Carlos Suárez Serrato

Duke University - Department of Economics ( email )

Durham, NC 27708-0204
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Owen M. Zidar

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

HOME PAGE: http://https://sites.google.com/site/omzidar/

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