Employment Structure and the Rise of the Modern Tax System

Anders Jensen

No 25502, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper studies how the transition from self-employment to employee-jobs over the long run of development explains growth in income tax capacity. I construct a new database which covers 100 household surveys across countries at different income levels and 140 years of historical data within the US (1870-2010). Using these data, I first establish four new stylized facts: 1) within country, the share of employees increases over the income distribution, and increases at all levels of income as a country develops; 2) the income tax exemption threshold moves down the income distribution as a country develops, tracking employee growth; 3) the employee share above the tax exemption threshold is maximized and remains constantly high; 4) movements in the tax exemption threshold account for the observed variation in tax collection across development. These findings are consistent with a model where a high employee share is a necessary condition for effective taxation and where the rise in income covered by information trails through increases in employee shares drives expansion of the income tax base. To provide a causal estimate of the impact of employee share on the exemption threshold, I study a state-led US development program implemented in the 1950s-60s which shifted up the level of employee share. The identification strategy exploits within-state changes in court-litigation status which generates quasi-experimental variation in the effective implementation date of the program. I find that the exogenous increase in employee share is associated with an expansion of the state income tax base and an increase in state income tax revenue.

JEL-codes: D31 H11 H21 H24 H26 H71 O15 O22 (search for similar items in EconPapers)
Date: 2019-01
New Economics Papers: this item is included in nep-his, nep-lma, nep-pbe and nep-pub
Note: DEV EFG PE
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (50)

Published as Anders Jensen, 2022. "Employment Structure and the Rise of the Modern Tax System," American Economic Review, vol 112(1), pages 213-234.

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