State Taxation and the Reallocation of Business Activity: Evidence from Establishment-Level Data

71 Pages Posted: 8 Sep 2015

See all articles by Xavier Giroud

Xavier Giroud

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Joshua D. Rauh

Stanford Graduate School of Business; Hoover Institution; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: September 2015

Abstract

In a sample of over 27 million establishments of U.S. firms with activities in more than one state, we estimate the impact of state business taxation on business activity. Only firms organized as subchapter C corporations are subject to the corporate tax code, whereas the income of partnerships, sole-proprietorships, and S corporations is passed through annually to the firm's owners and taxed at individual rates. For C corporations, both employment at existing establishments (intensive margin) and the number of establishments in the state (extensive margin) have corporate tax elasticities of -0.4. Pass-through entities, which serve as a control group for the corporate tax reforms, respond only to the personal tax code, with tax elasticities of -0.2 to -0.3. Around half of the effects are driven by reallocation of productive resources to other states where the treated firms have establishments. Capital shows similar patterns but is 36% less elastic than labor. A narrative approach confirms that the results are robust and strongest in the sample of tax changes that were implemented due to inherited budget deficits, long-run goals, or cross-state variation caused by Federal tax reforms.

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Suggested Citation

Giroud, Xavier and Rauh, Joshua D., State Taxation and the Reallocation of Business Activity: Evidence from Establishment-Level Data (September 2015). NBER Working Paper No. w21534, Available at SSRN: https://ssrn.com/abstract=2656937

Xavier Giroud (Contact Author)

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Joshua D. Rauh

Stanford Graduate School of Business ( email )

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Hoover Institution ( email )

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National Bureau of Economic Research (NBER)

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