Age Demographics and the Tax Mix in US States

Abstract

Countries with higher old-age dependency rates tend to rely less heavily on income taxes and more heavily on consumption taxes. We investigate this relationship in a panel of US states. To address endogeneity in a sub-national context due to migration, we use lagged in-state births to develop a new instrument for old-age dependency which is shown to be strong and relevant to the results. In an unbalanced panel spanning 1979–2013, we do find a negative relationship between old-age dependency ratio and income tax reliance. But, though persistent across specifications, it is not statistically significant under either ordinary least squares or instrumental variables despite strong instruments and a healthy sample size. We speculate as to what underlying mechanism might deliver a correlation that is robust among the Organisation for Economic Co-operation and Development countries but tepid among US states.