Paul L. Caron

Wednesday, September 12, 2012

Taxes, Incentives, and Economic Growth

Kenneth J. Meier (Texas A&M University, Department of Political Science) & Soledad Artiz (Harvard University, Department of Government), Taxes, Incentives, and Economic Growth: Assessing the Impact of Pro-business Taxes on U.S. State Economies:

State government policy frequently focuses on stimulating a healthy business environment with the assumption that this is linked with long term economic growth. The conventional wisdom is that a state’s tax rates are negatively correlated with economic development, prompting states to decrease business-targeted taxes to encourage economic stimulation. Surprisingly, however, very few studies have documented the long-term effects of these taxes on different facets of the state economy and overall business atmosphere. In short, we do not know how the level of business taxation actually affects the economies of states. Using panel data for all fifty U.S. states from 1977 to 2005, this paper examines the impact of state business taxes on the overall economic status of the state, specifically looking at their effect on economic development and business growth. With an elaborate set of controls, the paper links taxes to gross state product, job creation, personal income, poverty rates, and business establishments.

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