Broadening the State: Policy Responses to the Introduction of the Income Tax

Abstract

We present new evidence about a mechanism -- the broadening of the tax base -- through which governments increase state capacity. Our difference-in-differences identification strategy exploits the staggered introduction of the income tax across twentieth-century US states. We find that tax broadening is associated with 1) a significant increase in total revenues and 2) a significant increase in total government expenditures, and in particular spending on public goods in education and health. We show suggestive evidence that political ideology affects policy responses to the broadening of the tax base.

Keywords: taxation, public goods, education expenditures, politics, US states

JEL Classification: D78, H11, H41, H71, H75, N42, N92