“State Taxes and Spatial Misallocation”

That’s the title of a paper in this month’s issue of The Review of Economic Studies by Pablo Fajgelbaum, Eduardo Morales, Juan Carlos Suarez Serrato, and Owen Zidar. Here is the abstract:

We study state taxes as a potential source of spatial misallocation in the U.S.. 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% if government spending is held constant, and by 1.2% 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.

One of the tax reforms studied is the deduction on State and Local Taxes, which was reduced (n.b. not eliminated) in the Tax Cuts and Jobs Act:

Eliminating SALT would increase dispersion in tax payments, since places with high state taxes and high-income taxpayers would pay even higher taxes. Consequently, we find that eliminating SALT reduces welfare by roughly 0.6% and aggregate real GDP by approximately 0.3% if government spending is held constant, and by 0.8% and 0.4%, respectively, if government spending responds endogenously. Southeastern states experience the largest gains. The hardest hit states are those with a large share of high income people and high tax rates, especially in the Northeast.

Trends and Gradients in Top Income Tax Elasticities Across Countries, 1900 to 2014

A new paper by Enrico Rubolino (University of Essex) and Daniel Waldenstrom (Paris School of Economics) forthcoming in International Tax and Public Finance compiles more than a century of data on gross income before taxes and transfers for up to 30 industrialized countries. They estimate a net-of-tax rate regression on the share of total gross income held by a given percentile, yielding an estimate that is intended to show how sensitive income at the top is to top marginal income tax rates. Of course, with such a long time span, the devil of this analysis will be in the details of data construction. I’m going to skip that and just show some of the figures.

How have the raw data of interest evolved over time? Inversely to one another:

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Across the board, tax elasticities have been climbing since the 1980’s.

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The last 40 years have seen a rising tax elasticity through the top 5 percent:

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How have tax elasticities differed over time by major geographies? English speaking countries stand out in recent years.

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There is much more drilling down in the paper. Here is the abstract:

We construct a cross-country dataset spanning 1900–2014 to estimate the tax elasticity of top incomes. Our results show that top tax elasticities vary tremendously over time; they were medium to low before 1950, dropped to almost zero during the postwar era and increased to unprecedented levels since 1980. We document a marked income gradient of increasing tax responsiveness at the top. Tax avoidance, especially income shifting between wage and capital income, appears to be one important driver of these patterns. Wars, financial crises, and country-specific effects and trends also have a bearing on top elasticities.