To estimate the impact of state income taxes on labor supply, a researcher runs a regression of labor force participation rates on tax rates, controlling for state and year fixed effects. She concludes that higher taxes lower labor supply. What might be a valid objection to her conclusion, given her empirical approach?
A. States that raise taxes have more liberal voters than states that do not raise taxes.
B. States often raise taxes at the same time as each other.
C. States raise taxes more when their local labor force participation is low, making it harder to balance their budgets.
D. States raise taxes more when their local labor force participation is high, when voters are well‐employed and thus more willing to support public projects.
Answer: D. States raise taxes more when their local economies are doing well, when voters are well-employed and thus more willing to support public projects.