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Corporate taxes and vertical tax externalities: Evidence from narrative federal tax shocks

Yaniv Reingewertz

Regional Science and Urban Economics, 2018, vol. 68, issue C, 84-97

Abstract: The empirical aspects of vertical tax externalities have been studied fairly extensively, but with little consensus – a fact that may relate to difficulties in isolating exogenous components in tax setting policy. Adopting the case of the US and using a narrative approach (Romer and Romer, 2010), I study the vertical effects of federal tax shocks. I find that vertical tax externalities are modest in their size and are only present in corporate taxation. In particular, I estimate that a $1 billion increase in federal tax revenues reduces total state corporate tax revenues by approximately $27 million. Non-corporate state tax revenues do not seem to be affected by federal tax shocks. Taking a state micro-level approach and using firm-level business activity data, I show that the findings point to the erosion of states’ corporate tax bases.

Keywords: E62; H20; H71; H77; Vertical tax externality; Narrative tax shocks; Federal taxes; State taxes (search for similar items in EconPapers)
Date: 2018
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