Corporate taxes and vertical tax externalities: Evidence from narrative federal tax shocks

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The empirical aspects of vertical tax externalities have been studied fairly extensively, but with little consensus – a fact that may relate to difficulties in isolating exogenous components in tax setting policy. Adopting the case of the US and using a narrative approach (Romer and Romer, 2010), I study the vertical effects of federal tax shocks. I find that vertical tax externalities are modest in their size and are only present in corporate taxation. In particular, I estimate that a $1 billion increase in federal tax revenues reduces total state corporate tax revenues by approximately $27 million. Non-corporate state tax revenues do not seem to be affected by federal tax shocks. Taking a state micro-level approach and using firm-level business activity data, I show that the findings point to the erosion of states’ corporate tax bases.

Original languageEnglish
Pages (from-to)84-97
Number of pages14
JournalRegional Science and Urban Economics
StatePublished - Jan 2018

Bibliographical note

Publisher Copyright:
© 2017 Elsevier B.V.


  • Federal taxes
  • Narrative tax shocks
  • State taxes
  • Vertical tax externality

ASJC Scopus subject areas

  • Economics and Econometrics
  • Urban Studies


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