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.