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Ranking State Fiscal Structures Using Theory and Evidence

Neil Bania and Joe A. Stone
Journal of Policy Analysis and Management
Vol. 27, No. 4 (Autumn, 2008), pp. 751-770
Stable URL: http://www.jstor.org/stable/30163561
Page Count: 20
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Ranking State Fiscal Structures Using Theory and Evidence
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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.

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