How relative marginal tax rates affect establishment entry at state borders

Date
2022-05-12
Authors
Chen, Yulong
Duncan, Kevin D.
Ma, Liyuan
Orazem, Peter
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Springer Nature
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Economics
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Economics
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We apply border discontinuity analysis to measure the impact of marginal tax rates on capital income, property, sales, and income on establishment entry on either side of state borders. Establishments are more likely to enter on the side of the border with the lower marginal tax rates. The biggest differences in start-up rates are at borders with the largest tax rate differences, with property tax rate differences mattering most. We rank borders by the differences in start-ups due to tax structure, and we rank states by their distortionary tax structures. The greatest distortion in start-ups due to tax rates is at the Wyoming-Idaho border with an 8.6% lower probability of start-ups on the Idaho side. The most distortionary tax structure is Rhode Island’s at 14.2% lower probability of entry, but it is not as heavily disadvantaged at the border because its neighbor, Connecticut, has the third most distortionary tax structure.
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This article is published as Chen, Yulong, Kevin D. Duncan, Liyuan Ma, and Peter F. Orazem. "How relative marginal tax rates affect establishment entry at state borders." Small Business Economics (2022): 1-23. DOI: 10.1007/s11187-022-00624-7. Works produced by employees of the U.S. Government as part of their official duties are not copyrighted within the U.S. The content of this document is not copyrighted.
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