June 06, 2012

Imagine equilibrium in an integrated economy, say the US, consisting of a union of 50 states. Each of the states can be thought of an open economy where factors of production are free to move. The data shows that states with rising tax rates tend to suffer outmigration of both people and capital, and, as a result, a reduction in the tax base, while states with lower tax rates gain population, as well as experiencing a capital inflow and a tax base increase.

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