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Can State Taxes Redistribute Income?

Martin Feldstein and Marian Vaillant

No 4785, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The evidence presented in this paper supports the basic theoretical presumption that state and local governments cannot redistribute income. Since individuals can avoid unfavorable taxes by migrating to jurisdictions that offer more favorable tax conditions, a relatively unfavorable tax will cause gross wages to adjust until the resulting net wage is equal to that available elsewhere. The current empirical findings go beyond confirming this long-run tendency and show that gross wages adjust rapidly to the changing tax environment. Thus, states cannot redistribute income for a period of even a few years. The adjustment of gross wages to tax rates implies that a more progressive tax system raises the cost to firms of hiring more highly skilled employees and reduces the cost of lower skilled labor. A more progressive tax thus induces firms to hire fewer high skilled employees and to hire more low skilled employees. Since state taxes cannot alter net wages, there can be no trade- off at the state level between distribution goals and economic efficiency. Shifts in state tax progressivity, by altering the structure of employment in the state and distorting the mix of labor inputs used by firms in the state, create deadweight efficiency losses without achieving any net redistribution of income.

JEL-codes: H71 H73 (search for similar items in EconPapers)
Date: 1994-06
Note: PE
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Published as Journal of Public Economics, vol. 68, no. 2, pp. 369-396, 1998.

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Journal Article: Can state taxes redistribute income? (1998) Downloads
Working Paper: Can State Taxes Redistribute Income? (1994) Downloads
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