Optimal taxation and the stationarity of state tax rates

To minimize deadweight losses, tax rates should vary, unpredictably so agen ts cannot rearrange their work and consumption habits, As a result, optimal ly set tau rates will Lu a nonstationary time series or, put differently ch anges in the tax rate will be unpredictable. This paper identifies differen t fiscal policy environments under which groups of states operate and tests whether these commonalities explain the behavior of states' tax rate setti ng behavior. Results show that only states that must balance It ss than 50% of their budgets or have a supermajority rule optimally set tax rates.