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  • Open Daily: 10am - 10pm
    Alley-side Pickup: 10am - 7pm

    3038 Hennepin Ave Minneapolis, MN
    612-822-4611

Open Daily: 10am - 10pm | Alley-side Pickup: 10am - 7pm
3038 Hennepin Ave Minneapolis, MN
612-822-4611
U.S. State Income Tax and Macroeconomics.

U.S. State Income Tax and Macroeconomics.

Rhee, Tae-Hwan

Paperback

Economics

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ISBN10: 1243714840
ISBN13: 9781243714848
Publisher: Proquest Umi Dissertation Pub
Pages: 82
Weight: 0.36
Height: 0.17 Width: 7.44 Depth: 9.69
Language: English
Policy-makers often claim to face a tradeoff between economic growth and egalitarian wealth distribution. However, this tradeoff is ambiguous; economic theory cannot predict with certainty whether more aggressive redistribution, typically through a more progressive income tax, will lead to lower economic growth. The first chapter of this dissertation investigates whether such a relationship exists empirically across states within the U.S., for the period from 1979 to 2004. Using the IRS Public Use File and the NBER TaxSim calculator, for each state and year, the average rate and the progressivity (measured by the Suits index and Effective Progression) of state income tax are first calculated and documented. After controlling for the average tax rate and state/year fixed effects, I find that the current year's income tax progressivity has a strong negative effect on the annual growth rate of real gross state product 3 years later. The results are the same using either gross state products or per-capita values, while net migration does not show any significant relation with income tax progressivity. This suggests that there does exist a negative relationship between income tax progressivity and macroeconomic growth, which can be explained by different migration patterns or labor supply elasticities across different income groups. In the second chapter of this dissertation, I turn to the theoretical side of progressive state income tax in the U.S. The principle of equal sacrifice has long been considered as the basis for progressive taxation. I investigates whether each state's effective individual income tax rate follows this principle. The two- and three-parameter versions of equal-sacrifice income tax function are estimated for each state for the years 1990 and 2000, using again the IRS public use file and the NBER TaxSim. I first show that the effective state income tax can be well approximated by two-parameter equal sacrifice function. In general, this function fits the actual state tax data better than the alternative flat tax function. When the third parameter---the coefficient of relative risk aversion (gamma)---is freed and estimated, the fit gets even better, confirming that the equal sacrifice function can be both tractable and realistic model of effective state income tax. The result shows considerable difference in among the states, suggesting that the residents' preference can be quite different across states.

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