State Taxation and the Reallocation of Business Activity: Evidence from Establishment-Level Data

Xavier Giroud and Joshua Rauh

No 21534, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In a sample of over 27 million establishments of U.S. firms with activities in more than one state, we estimate the impact of state business taxation on business activity. Only firms organized as subchapter C corporations are subject to the corporate tax code, whereas the income of partnerships, sole-proprietorships, and S corporations is passed through annually to the firm's owners and taxed at individual rates. For C corporations, both employment at existing establishments (intensive margin) and the number of establishments in the state (extensive margin) have corporate tax elasticities of -0.4. Pass-through entities, which serve as a control group for the corporate tax reforms, respond only to the personal tax code, with tax elasticities of -0.2 to -0.3. Around half of the effects are driven by reallocation of productive resources to other states where the treated firms have establishments. Capital shows similar patterns but is 36% less elastic than labor. A narrative approach confirms that the results are robust and strongest in the sample of tax changes that were implemented due to inherited budget deficits, long-run goals, or cross-state variation caused by Federal tax reforms.

JEL-codes: H25 H71 H73 (search for similar items in EconPapers)
Date: 2015-09
New Economics Papers: this item is included in nep-acc, nep-pbe and nep-pub
Note: CF PE
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Citations: View citations in EconPapers (13)

Published as Xavier Giroud & Joshua Rauh, 2019. "State Taxation and the Reallocation of Business Activity: Evidence from Establishment-Level Data," Journal of Political Economy, vol 127(3), pages 1262-1316.

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