Broadening State Capacity

74 Pages Posted: 20 Jul 2015

See all articles by Mark Dincecco

Mark Dincecco

University of Michigan at Ann Arbor

Ugo Troiano

University of Michigan at Ann Arbor - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: July 2015

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.

Suggested Citation

Dincecco, Mark and Troiano, Ugo, Broadening State Capacity (July 2015). NBER Working Paper No. w21373, Available at SSRN: https://ssrn.com/abstract=2633329

Mark Dincecco (Contact Author)

University of Michigan at Ann Arbor ( email )

HOME PAGE: http://sites.google.com/umich.edu/dincecco

Ugo Troiano

University of Michigan at Ann Arbor - Department of Economics ( email )

611 Tappan Street
Ann Arbor, MI 48109-1220
United States

HOME PAGE: http://sites.google.com/a/umich.edu/troiano

National Bureau of Economic Research (NBER)

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