THE EFFECTS OF STATE PERSONAL INCOME-TAX DIFFERENTIALS ON WAGES

A frequently cited assumption in the tax incidence literature is that taxes on capital may be borne by various sectors of the economy while labor taxes are borne by labor. While a national labor tax may indeed be borne by labor, theoretical results from the standard Harberger general equilibrium model show that labor does not necessarily bear the burden of a differential wage tax. In some cases, wage earners are compensated for higher taxes in the form of higher gross wages. Since states impose wage taxes (via the income tax) at different rates, state personal income taxes may explain a portion of wage differences across states. An empirical model tests the incidence of the state personal income tax and finds that in 25% of the cases examined, labor does not bear the full burden of the tax.