Peter Orazem (Iowa State University)

Peter Orazem (Iowa State University)

Sep 14, 2023 - 3:40 PM
to Sep 14, 2023 - 5:00 PM

Description: Labor-Public Economics Workshop: Peter Orazem (Iowa State University)

Location: 368A Heady Hall

Contact Person: John Winters

Title: State Marginal Tax Rates and State Capital per Worker, 1977-2017

Abstract: There are substantial differences in capital per worker across states that have persisted over time.  This study demonstrates that in the context of a neoclassical growth model, differences in marginal tax rates on  property, capital gains, and corporate income will lead to persistent differences in capital per worker across states. If after-tax returns to capital are equalized across states, taxes and ales and wage income will not affect capital-labor ratios. These theoretical predictions are supported by data on state marginal tax rates and capital per worker over the 1977-2017 sample period.  At sample means, a unit increase in each of the 5 taxes lowers capital -labor ratios by a small but statistically significant 0.038%. At 2017 sample means, the combined effect of the taxes explains 36.6% of the variation in capital per worker across states.