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State Tax Policy and Entrepreneurship

State Tax Policy and Entrepreneurship. Donald Bruce, Xiaowen Liu, and Matthew Murray Center for Business and Economic Research and Department of Economics The University of Tennessee, Knoxville Conference on Subnational Government Competition The University of Tennessee April 25, 2014.

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State Tax Policy and Entrepreneurship

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  1. State Tax Policy and Entrepreneurship Donald Bruce, Xiaowen Liu, and Matthew Murray Center for Business and Economic Research and Department of Economics The University of Tennessee, Knoxville Conference on Subnational Government Competition The University of Tennessee April 25, 2014

  2. Policy Background • States have a long history of using income and sales tax policy to compete for mobile entrepreneurs and/or encourage new ones • 2012: Kansas removes income tax on pass-through income • 2014: Missouri considers 25% deduction of pass-through income • Other states considering income tax repeal, with small business promotion as one selling point • Empirical literature has not generally supported this at the state level

  3. Contributions • Intensive-margin indicators of success • Most prior work is on extensive margin • Policy makers care more about success • Dynamic panel regression • Most prior work uses fixed effects • Underlying trends matter • Expanded specification and time period • 1978-2009

  4. Measures of Performance • Nonfarm Proprietors’ Income (NFPI) • Per capita • As a % of total state personal income • As a % of national NFPI • Nonfarm Proprietors’ Employment (NFPE) • As a % of total state employment • As a % of national NFPE • Nonfarm Proprietors’ Productivity • NFPI/NFPE

  5. Empirical Approach • Past performance can predict future • Arellano-Bond (1991) estimator • Y is the outcome of interest • X includes state policy characteristics • Z includes state economic/demographic factors • is a state fixed effect • is a year fixed effect • is a well-behaved error

  6. AB 101 • Addresses time series issues in panel data • Model transformed to first-difference • Removes state fixed effect • Inclusion of lagged Y raises endogeneity concern; external instruments not required • Arellano-Bover (1995) / Blundell-Bond (1998) approach used as an alternative

  7. Independent Variables • Policy • Sales tax rate • Top marginal personal income tax (PIT) rate • Top marginal corporate income tax (CIT) rate • Sales factor weight in CIT apportionment • Per capita state government expenditures • Tax Amnesty programs • Economic/Demographic • Unemployment rate • % of population aged 65 and older • Crime rate • % female • Agricultural, Manufacturing % of GSP • Nonfarm job growth • Population density

  8. NFPI and NFPE, 1978-2009

  9. NFPI/E Shares and Productivity

  10. Summary Statistics

  11. Summary Statistics

  12. AB Results

  13. Discussion • Main result echoes Bruce & Deskins (2012): taxes generally don’t matter • Higher sales factor weight  lower NFPI per capita and lower NFP productivity • Higher state gov’t. expend. per capita  higher NFP productivity • Other controls matter • Higher unemployment  higher NFPI/E shares • Older population  lower NFPE share; higher NFP productivity • Higher NF job growth  higher NFPI/E shares; lower NFP productivity • Lower crime rate  higher NFPI per capita • Higher pop. Density  higher NFPE share • Lower GSP shares in manufacturing or agriculture  higher NFPI • Lags always matter (dynamic specification is important)

  14. Comparison to Bruce & Deskins(2012)

  15. Comparison to Bruce & Deskins(2012)

  16. Comparison to Bruce & Deskins(2012)

  17. Comparison to Bruce & Deskins(2012)

  18. Comparison to Bruce & Deskins(2012)

  19. Comparison to Bruce & Deskins(2012)

  20. Discussion • Simply adding (1) variables or (2) years of data or (3) estimating an AB model would have generated misleading significance • The combination of these three updates is important • The additional years of data (2003-2009) are enough to drive the importance of a dynamic estimation approach

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