STATE TAXATION AND BUSINESS DEVELOPMENT: A MODEL AND AN APPLICATION TO THE BANKING INDUSTRY (TAXATION)

In 1981, Delaware enacted The Financial Center Development Act. The Act largely deregulated Delaware banking and cut taxes for large banks. Many large banks moved to Delaware in response. This dissertation examines why these banks moved. This dissertation concludes that state taxes have some, but not a large, short run impact on business development levels. This finding is consistent with the literature on interstate tax competition reviewed in Chapter 1. The models in this dissertation extend that literature in several ways. Much of the earlier literature relies on reduced form linear regression approaches. Chapter 2 builds on a structural model of tax competition. Also, this dissertation uses a new data set. These data are based at the bank level, reducing aggregation bias problems that affect much of the literature on interstate tax competition.; Chapter 2 of this dissertation develops a bank location model. The model describes how a bank chooses between two states. The bank considers short run profit differentials, long run profit differentials, moving costs, and state tax rates. Chapter 3 estimates the parameters of the model assuming short run bank profitability in a state is described by an exponential distribution. Chapter 3 uses these estimates to calculate the Delaware outcome had the state not cut its bank tax rates. The estimates suggest Delaware's bank growth would not have fallen much had the state not cut taxes.; Chapter 4 redoes Chapter 3's calculations assuming short run bank profitability in a state is described by a normal distribution. It shows again that Delaware's tax cut was not a major factor in the state's attractiveness to banks. The dissertation's findings do not appear to be dependent upon my distributional assumptions.; Chapter 5 considers several extensions. The chapter outlines how policymakers' "tastes for taxation" could be estimated from tax choice data. The chapter also shows how the empirical procedure could be modified to allow precommitment to tax rates by politicians. Finally, the chapter discusses well-publicized examples of interstate competition like the battle for the Saturn manufacturing plant.