An empirical analysis of taxation and state economic growth.

Abstract

The problem addressed mostly in my study is the endogeneity of tax variables in the growth model. Further, the efforts to find instruments for tax variable are very crucial. I find that demographic, economic, and political structure variables are important for the determination of the change in state tax rates. Special for political issues, this empirical information supports the common knowledge that Democratic legislatures favor higher tax rates compared to Republicans, both in state and federal levels.

This study aims to empirically investigate the effect of taxes on economic growth in 45 states in the United States in the period 1960 to 1999. The literature review shows that both state level and country level studies result with two different answers on how taxes affect economic growth. Most of those studies show a negative impact, while some significant studies show a positive effect of taxes on economic growth. In overall, this study has shown that both initially and subsequently, taxes have a negative impact on state economic growth.