A Taxing Journey: Tax Adoptions and Interstate Migration in the Early 20th Century

Stefan Smutny and Kirsten Wandschneider

No 18729, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper examines the relationship between sequential income tax adoptions and interstate migration in US states between 1900 and 1930. Exploiting the sequential introduction of personal and corporate state income taxes, we analyze matched full-count US census data to explore the causal links between state income tax introductions and migration patterns. To guide our empirical approach, we develop a simple migration gravity model with multilateral resistance. Employing a three-way fixed effects Poisson Pseudo-Maximum Likelihood (FE-PPML) framework, we estimate the gravity equation, incorporating a tax introduction indicator. Our findings indicate that the implementation of personal state income taxes lead to an 8.7% increase in internal migration. The adoption of corporate state income taxes is associated with a larger overall rise in internal migration (11.3%) across the population. Our results are robust to other interstate migration trends and hold across different subgroups of the population. We conclude that income tax adoptions had substantial implications for interstate migration during this period, potentially operating through two distinct channels. First, the direct taxation of personal income influenced migration decisions. Second, the introduction of corporate income taxes prompted business relocation, which, in turn, affected migration.

JEL-codes: C23 E65 H24 H25 H26 N32 N92 R23 (search for similar items in EconPapers)
Date: 2024-01
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