Research Database

An important contention of Proposition 13's proponents was that a tax reduction would boost economic activity. It is too early to ascertain whether or not this has happened in California. This study addresses the issue in a more general context by attempting to answer the question: Do state and local taxes affect economic growth? Economic theory tells us that a change in the level of state and local taxes might affect economic growth in a number of ways, but the direction of the net result is not obvious. The methodology used here is multiple regression analysis across states. The major contribution of this study is the use of other variables besides taxes to explain growth in personal income, reducing possible biases in the results of previous work in this area. The results of this study indicate that state and local taxes may be a significant deterrent to growth in personal income.

A model is presented in which demand deposits backed by fractional currency reserves and public insurance can be beneficial. The model uses Samuelson's pure consumption-loans model. The case for demand deposits, reserves, and deposit insurance rests on costs of illiquidity and incomplete information. The effect of deposit insurance depends upon how, and at what cost, the government meets its insurer's obligation--something which is not specified in practice. It remains possible that demand deposits and deposit insurance are a distortion, and reserve requirements serve only to limit the size of this distortion.

A speech delivered to the Marketing Research Seminar for Gas Utilities, sponsored by the American Gas Association, October 2, 1969.