Broadening State Capacity: Fiscal and Mobility Consequences of the Introduction of the Income Tax

Abstract

We examine 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 dataset of U.S. states between 1900 and 2010. 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 increased revenue and expenditure more in per capita terms than in absolute terms, with revenue per capita increasing by 15 percent in the long run. Furthermore, we find that the introduction of the income tax led to significant outmigration to non-income-tax states, particularly by high earners. We provide evidence that migration respondsmore to tax increases starting froma zero rate than to equivalent increases starting from a positive rate.

Keywords: State Capacity, Institutional Reform, Taxation, Mobility, USA

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