SUBNATIONAL TAXATION AND CAPITAL MOBILITY: ESTIMATES OF TAX-PRICE ELASTICITIES

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Abstract
A new measure of relative business tax burdens (the after-tax rate of return on a marginal investment) is employed in an econometric study of the effect of interstate tax differentials on the location of capital investment. Based on a profit-maximizing model of a firm, an input demand equation for capital is developed and estimated by instrumental variables. The cross-sectional micro data set encompasses twenty manufacturing industries in twenty states. Tax burden differentials are found to be statistically significant and negatively related to the size and location of a capital investment. The empirical results contradict the view that state and local taxes exert little or no influence on business location decisions.

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