Revealing Values: Applying the Inverse-Optimum Method to Us State Taxes

Robert Embree

National Tax Journal, 2023, vol. 76, issue 1, 37 - 61

Abstract: The tax systems of different jurisdictions reflect different social preferences about the relative value, or weight, placed on taxes or transfers to each income group. I apply the inverse-optimum income tax method to quantify these preferences by calculating the implied weights for every US state. To capture major features of US state tax systems, I extend the existing theory underlying the inverse-optimum method to include sales taxes, property taxes, and both national and state income taxes. Using Internal Revenue Service data, I calculate effective marginal income tax and commodity tax rates for each state and income level, and use these to find the implied weights for both single and joint filers in each income group in every US state. I observe substantial differences in social preferences across states, and I find weights that decline little above $100,000 and that do not decrease monotonically as might be expected from most theories of social welfare.

Date: 2023
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