The Introduction of the Income Tax, Fiscal Capacity, and Migration: Evidence from U.S. States
80 Pages Posted: 25 Dec 2017 Last revised: 29 Jun 2022
Date Written: June 29, 2022
We evaluate how fiscal capacity and migration respond to the introduction of the individual income tax, drawing on new panel data on U.S. states from 1900 to 2010. We find that states that introduced the income tax experienced a 12 percent increase in total revenue per capita in the near term, a 15 percent increase in the medium term, and a 17 percent increase in the long term. However, the introduction of the income tax did not significantly change the absolute level of revenue over the long term, at least for post-World War II adopters. To explain this difference in the per capita and absolute results, we show that the introduction of the income tax induced significant outmigration to non-income tax states by middle- and high-earning households.
Keywords: State Capacity, Institutional Reform, Taxation, Mobility, USA
JEL Classification: H11, H41, H71, N42, D78
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