THE LAGGED IMPACT OF STATE AND LOCAL TAXES ON ECONOMIC ACTIVITY AND POLITICAL BEHAVIOR

Abstract

Politicians are frequently characterized as making fiscal decisions based on a shorter time horizon than is required for full taxpayer adjustment, thus generating near term benefits and relatively high tax rates. This argument requires a negative impact of taxes on economic activity distributed over a relatively long time period. Considerable empirical evidence suggests that state and local taxes do not significantly impact the geographic distribution of economic activity; this analysis, however, finds a significant negative distributed lag impact of such taxes on capital formation. The approach emphasizes interstate tax competition in formulating the cross‐section time‐series estimating equation.