State taxes and spatial misallocation

Author / Creator

Fajgelbaum, Pablo, author

Available as

Online

Summary

We study state taxes as a potential source of spatial misallocation in the United States. We build a spatial general-equilibrium model in which the distribution of workers, firms, and trade flows a...

We study state taxes as a potential source of spatial misallocation in the United States. We build a spatial general-equilibrium model in which the distribution of workers, firms, and trade flows across states responds to state taxes and public-service provision. We estimate firm and worker mobility elasticities and preferences for public services using data on the distribution of economic activity and state taxes from 1980 to 2010. A revenue-neutral tax harmonization leads to aggregate real-GDP and welfare gains of 0.7%. Tax cuts by individual states lower own-state tax revenues and economic activity, and generate cross-state spillovers depending on trade linkages.

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