Ranking State Fiscal Structures using Theory and Evidence
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Date
2007-06
Authors
Bania, Neil
Stone, Joe A.
Journal Title
Journal ISSN
Volume Title
Publisher
University of Oregon, Dept of Economics
Abstract
This paper offers unique rankings of the extent to which fiscal structures of U.S. states
contribute to economic growth. The rankings are novel in two key respects: they are well
grounded in established growth theory, in which the effect of taxes depends both on the level of
taxes and on the composition of expenditures; and they are derived from actual estimates of the
link between fiscal structures and economic growth. Estimates for the latter yield a growth hill,
in which the incremental effect of taxes spent on productive services and infrastructure initially
rises, reaches a peak, and then declines. Rankings derived from these estimates differ sharply
from typical rankings based on levels of taxation alone. Two hypothetical policy experiments
highlight both the growth-hill effects of tax investments in productive services and infrastructure
and the short- and long-term tradeoffs in attempting to fund strong social services.
Description
30 p.
Keywords
Tax investments, Fiscal structures, Economic growth, Growth theory