Broadening State Capacity

Traviss Cassidy, Mark Dincecco and Ugo antonio Troiano

No 21373, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We provide new evidence about the fiscal and mobility consequences of the introduction of the income tax, a major investment in modern state capacity. Drawing on archival data, we introduce a novel panel database that spans all 50 U.S. states between 1900 and 2008. Our research design exploits the staggered introduction of the income tax across states, while accounting for the potentially selective timing of adoption. We find that tax broadening significantly increased total revenue and expenditure in the short run but not the long run, while revenue and expenditure per capita significantly increased on a permanent basis. To explain these results, we show that the introduction of the income tax led to significant outmigration to non-income-tax states, particularly by high earners. Our findings demonstrate that the introduction of the income tax allowed U.S. states to significantly increase their revenue-raising capacity on a per capita basis. Nonetheless, population mobility provided a partial check on the absolute size of state governments.

JEL-codes: D78 H11 H41 H75 N0 N21 N22 N41 N42 (search for similar items in EconPapers)
Date: 2015-07
New Economics Papers: this item is included in nep-pbe and nep-pub
Note: DAE PE POL
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Citations: View citations in EconPapers (3)

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