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

72 Pages Posted: 25 Dec 2017 Last revised: 22 May 2020

See all articles by Traviss Cassidy

Traviss Cassidy

University of Alabama

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: May 22, 2020

Abstract

We examine the fiscal and mobility consequences of the introduction of a major new tax, distinguishing between two effects: the effect of raising the tax rate, and the effect of moving from a zero to a non-zero rate. 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. Our main contribution is to show that the introduction of a new tax has an effect that goes above and beyond its effect on the net-of-tax rate, due to administrative costs, salience, or expectations. We find that the introduction of a new income tax of 1 percent induces the same outmigration response as increasing an existing tax from 1 to 10 percent.

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

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

Suggested Citation

Cassidy, Traviss and Dincecco, Mark and Troiano, Ugo, Broadening State Capacity: Fiscal and Mobility Consequences of the Introduction of the Income Tax (May 22, 2020). Available at SSRN: https://ssrn.com/abstract=3093041 or http://dx.doi.org/10.2139/ssrn.3093041

Traviss Cassidy

University of Alabama ( email )

P.O. Box 870244
Tuscaloosa, AL 35487
United States

Mark Dincecco

University of Michigan at Ann Arbor ( email )

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

Ugo Troiano (Contact Author)

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)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
131
Abstract Views
838
rank
112,924
PlumX Metrics