August 16, 2020

In an idealized world , absent “transportation costs” arbitrage ensures the equality of product prices and factor returns across different localities in the world. But what if a factor faces prohibitive transportation costs and is unable to move across boundaries, will its returns still be equalized across localities? Nobel Prize Winner Paul Samuelson answered the question in a landmark academic paper. He showed that, under some general conditions, if the number of mobile factors plus goods traded is equal to or exceeds the number of mobile and immobile factors of production , the factor returns are equalized across localities. The analysis also yields an important result: The immobile factor, land, bears the full burden of the tax and the mobile factors do not. Symmetrically a tax cut would have the opposite effect , land captures the full amount of the tax cut. The investment implication is straightforward: The differential rates return of the immobile factors across localities are inversely and disproportionately related to increases in the tax rate differential across state lines. An astute investor would keep track of the tax rate differential and increase exposure to fixed factors located in areas that are reducing their tax rate in both absolute terms as well as relative to other states. Conversely the strategy suggests avoiding economies that are increasing their tax rates in both absolute and relative terms.

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