The introduction of the income tax, fiscal capacity, and migration: evidence from U.S. States

Cassidy, Traviss and Dincecco, Mark and Troiano, Ugo Antonio (2017): The introduction of the income tax, fiscal capacity, and migration: evidence from U.S. States.

Abstract

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: state capacity; institutional change; fiscal reform; taxation; migration; USA
• Subjects: D - Microeconomics > D7 - Analysis of Collective Decision-Making > D78 - Positive Analysis of Policy Formulation and Implementation; H - Public Economics > H1 - Structure and Scope of Government > H11 - Structure, Scope, and Performance of Government; H - Public Economics > H4 - Publicly Provided Goods > H41 - Public Goods; H - Public Economics > H7 - State and Local Government ; Intergovernmental Relations > H71 - State and Local Taxation, Subsidies, and Revenue; N - Economic History > N4 - Government, War, Law, International Relations, and Regulation > N42 - U.S. ; Canada: 1913-

References

Acemoglu, Daron, Camilo García-Jimeno, and James Robinson, “State Capacity and Economic Development: A Network Approach,” American Economic Review, 2015, 105 (8), 2364–2409.

--, Suresh Naidu, Pascual Restrepo, and James Robinson, “Democracy Does Cause Growth,” Journal of Political Economy, 2019, 127 (1), 47–100.

Advisory Commission on Intergovernmental Relations, Significant Features of Fiscal Federalism, 1976-77: Federal-State-Local Finances, Vol. 2, Revenue and DebtMarch 1977.

Agrawal, David and Dirk Foremny, “Relocation of the Rich: Migration in Response to Top Tax Rate Changes from Spanish Reforms,” Review of Economics and Statistics, 2019, 101 (2), 214–232.

Aidt, Toke and Peter Jensen, “The Taxman Tools Up: An Event History Study of the Introduction of the Personal Income Tax,” Journal of Public Economics, 2009, 93 (1), 160–175.

Akcigit,Ufuk, John Grigsby, Tom Nicholas, and Stefanie Stantcheva, “Taxation and Innovation in the Twentieth Century,” The Quarterly Journal of Economics, 2022, 137 (1), 329–385.

--, Salomé Baslandze, and Stefanie Stantcheva, “Taxation and the International Mobility of Inventors,” American Economic Review, 2016, 106 (10), 2930–2981.

Angrist, Joshua and Guido Kuersteiner, “Causal Effects of Monetary Shocks: Semiparametric Conditional Independence Tests with a Multinomial Propensity Score,” Review of Economics and Statistics, 2011, 93 (3), 725–747.

Bagchi, Sutirtha and Libor Dušek, “The Effects of Introducing Withholding and Third-Party Reporting on Tax Collections: Evidence from the U.S. State Personal Income Tax,” Journal of Public Economics, 2021, 204, 104537.

Bailey, Beulah, “Review of State Tax Legislation, 1930,” Proceedings of the Annual Conference on Taxation under the Auspices of the National Tax Association, 1930, 23, 421–444.

Bailey, Martha, Karen Clay, Price Fishback, Michael Haines, Shawn Kantor, Edson Severnini, and AnnaWentz, “U.S. County-LevelNatality andMortalityData, 1915-2007,” Technical Report, ICPSR 2018.

Baker, Andrew, David Larcker, and Charles Wang, “How Much Should We Trust Staggered Difference-in-Differences Estimates?,” Journal of Financial Economics, 2022, 144 (2), 370–395.

Bakija, Jon, “Documentation for a Comprehensive Historical U.S. Federal and State Income Tax Calculator Program,”Working Paper,Williams College 2019.

Bakija, Jon and Joel Slemrod, “Do the Rich Flee from High State Taxes? Evidence from Federal Estate Tax Returns,”Working Paper 10645, NBER July 2004.

Bartik, Timothy, Who Benefits from State and Local Economic Development Policies?, Kalamazoo, MI: Upjohn Institute for Employment Research, 1991.

Batini, Nicoletta, Celasun Oya, Thomas Dowling,Marcello Estevão, GeoffreyKeim,Martin Sommer, and Evridiki Tsounta, “United States: Selected Issues Paper,” Country Report 10/248, International Monetary Fund 2010.

Berry, Frances and William Berry, “Tax Innovation in the States: Capitalizing on Political Opportunity,” American Journal of Political Science, 1992, 36 (3), 715–742.

Besley, Timothy and Torsten Persson, “Taxation and Development,” in Alan Auerbach, Raj Chetty, Martin Feldstein, and Emmanuel Saez, eds., Handbook of Public Economics, Elsevier, 2013, pp. 51–110.

Bigham, Truman, “Fiscal Aspects of the State Income Tax Since 1918,” American Economic Review, 1929, 19 (2), 227–245.

Blakey, Roy and Violet Johnson, “State Income Taxation,” Taxes – The Tax Magazine, 1941, 19 (3), 131.

Borusyak, Kirill, Xavier Jaravel, and Jann Spiess, “Revisiting Event Study Designs: Robust and Efficient Estimation,”Working Paper 2022.

Callaway, Brantly and Pedro H.C. Sant’Anna, “Difference-in-Differences with Multiple Time Periods,” Journal of Econometrics, 2021, Forthcoming.

Cameron, Colin, Jonah Gelbach, and Douglas Miller, “Bootstrap-Based Improvements for Inference with Clustered Errors,” Review of Economics and Statistics, 2008, 90 (3), 414–427.

Casaburi, Lorenzo and Ugo Troiano, “Ghost-House Busters: The Electoral Response to a Large Anti–Tax Evasion Program,” Quarterly Journal of Economics, 2016, 131 (1), 273–314.

Cengiz, Doruk, Arindrajit Dube, Attila Lindner, and Ben Zipperer, “The Effect of Minimum Wages on Low-Wage Jobs,” Quarterly Journal of Economics, 2019, 134 (3), 1405–1454.

Columbus Daily Telegram, “Taxation Chief Problem forMany Years,” April 3, 1967, p. 7.

Comstock, Alzada, State Taxation of Personal Incomes, New York: Columbia University, 1921.

de Chaisemartin, Clément and Xavier D’Haultfoeuille, “Two-Way Fixed Effects Estimators with Heterogeneous Treatment Effects,” American Economic Review, 2020, 110 (9), 2964–96.

De Weerdt, Joachim, “Risk-Sharing and Endogenous Network Formation,” in Stefan Dercon, ed., Insurance against Poverty, Oxford: Oxford University Press, 2004, pp. 197–216.

Dell, Melissa, Nathan Lane, and Pablo Querubin, “The Historical State, Local Collective Action, and Economic Development in Vietnam,” Econometrica, 2018, 86 (6), 2083–2121.

Deshpande,Manasi and Yue Li, “WhoIs ScreenedOut? Application Costs and the Targeting ofDisability Programs,” American Economic Journal: Economic Policy, November 2019, 11 (4), 213–48.

Dincecco, Mark, Political Transformations and Public Finances, Cambridge: Cambridge University Press, 2011. -- and Mauricio Prado, “Warfare, Fiscal Capacity, and Performance,” Journal of Economic Growth, 2012, 17 (3), 171–203.

Fox,William, “History and Economic Impact of the Sales Tax,” in Jerry Janata, ed., Sales Taxation, Institute for Professionals in Taxation, 2004.

Frey, William, “The Great American Migration Slowdown: Regional and Metropolitan Dimensions,” Research Report, Brookings 2009.

Gadenne, Lucie and Monica Singhal, “Decentralization in Developing Economies,” Annual Review of Economics, 2014, 6 (1), 581–604.

Gardner, John, “Two-Stage Difference in Differences,” Working Paper, University of Mississippi 2021.

Gennaioli, Nicola and Hans-Joachim Voth, “State Capacity and Military Conflict,” Review of Economic Studies, 2015, 82 (4), 1409–1448.

Gillitzer, Christian, “Do Output Contractions Cause Investment in Fiscal Capacity?,” American Economic Journal: Economic Policy, 2017, 9 (2), 189–227.

Goodman-Bacon, Andrew, “Difference-in-Differences with Variation in Treatment Timing,” Journal of Econometrics, 2021, 225 (2), 254–277.

Gordon, Roger andWei Li, “Tax Structures in Developing Countries: Many Puzzles and a Possible Explanation,” Journal of Public Economics, 2009, 93 (7), 855–866.

Gormley, Todd andDavidMatsa, “GrowingOut of Trouble? Corporate Responses to Liability Risk,” Review of Financial Studies, 2011, 24 (8), 2781–2821.

Graham, Bryan S., “Chapter 2 - Dyadic Regression,” in Bryan Graham and Áureo de Paula, eds., The Econometric Analysis of Network Data, Academic Press, 2020, pp. 23–40. , “Chapter 2 - Network Data,” in Steven N. Durlauf, Lars Peter Hansen, James J. Heckman, and

Rosa L. Matzkin, eds., Handbook of Econometrics, Volume 7A, Vol. 7 of Handbook of Econometrics, Elsevier, 2020, pp. 111–218.

Grembi, Veronica, Tommaso Nannicini, and Ugo Troiano, “Do Fiscal Rules Matter?,” American Economic Journal: Applied Economics, July 2016, 8 (3), 1–30.

Groves, Harold M., “Review of State Tax Legislation, 1931-1932,” Proceedings of the Annual Conference on Taxation under the Auspices of the National Tax Association, 1932, 25, 9–25.

Hoffman, Philip, “What Do States Do? Politics and Economic History,” The Journal of Economic History, 2015, 75 (2), 303–332.

Jensen, Anders, “Employment Structure and the Rise of the Modern Tax System,” American Economic Review, 2022, 112 (1), 213–34.

Kaplan, Greg and SamSchulhofer-Wohl, “Understanding the Long-Run Decline in InterstateMigration,” International Economic Review, 2017, 58 (1), 57–94.

Kleven, Henrik, Camille Landais, and Emmanuel Saez, “Taxation and InternationalMigration of Superstars: Evidence from the European Football Market,” American Economic Review, 2013, 103 (5), 1892–1924.

, , , and Esben Schultz, “Migration andWage Effects of Taxing Top Earners: Evidence from

the Foreigners’ Tax Scheme inDenmark,”Quarterly Journal of Economics, 2014, 129 (1), 333–378.

, , Mathilde Muñoz, and Stefanie Stantcheva, “Taxation and Migration: Evidence and Policy Implications,” Journal of Economic Perspectives, 2020, 34 (2), 119–142.

, Claus Thustrup Kreiner, and Emmanuel Saez, “Why CanModern Governments Tax SoMuch? An AgencyModel of Firms as Fiscal Intermediaries,” Economica, 2016, 83 (330), 219–246.

Liebig, Thomas, Patrick Puhani, and Alfonso Sousa-Poza, “Taxation and Internal Migration– Evidence from the Swiss Census Using Community-Level Variation in Income Tax Rates,” Journal of Regional Science, 2007, 47 (4), 807–836.

Lindert, Peter, Growing Public, Cambridge: Cambridge University Press, 2004.

Manning, Raymond E., “State Tax Legislation, 1935,” Proceedings of the Annual Conference on Taxation under the Auspices of the National Tax Association, 1935, 28, 27–62.

, “State Tax Legislation, 1936,” The Bulletin of the National Tax Association, 1936, 22 (3), 73–79.

, “State Tax Legislation—1938,” Proceedings of the Annual Conference on Taxation under the Auspices of the National Tax Association, 1938, 31, 7–22.

, “State Tax Legislation, 1939,” Proceedings of the Annual Conference on Taxation under the Auspices of the National Tax Association, 1939, 32, 5–26.

, “State Tax Legislation, 1941,” Proceedings of the Annual Conference on Taxation under the Auspices of the National Tax Association, 1941, 34, 13–29.

McKenna, William, “The Income Tax in Pennsylvania,” Pennsylvania History: A Journal of Mid- Atlantic Studies, 1960, 27 (3), 291–310.

Mehrotra, Ajay, Making the Modern American Fiscal State, Cambridge: Cambridge University Press, 2013.

Molloy, Raven, Christopher Smith, and Abigail Wozniak, “Internal Migration in the United States,” Journal of Economic Perspectives, 2011, 25 (3), 173–196.

Moretti, Enrico and Daniel Wilson, “The Effect of State Taxes on the Geographical Location of Top Earners: Evidence from Star Scientists,” American Economic Review, 2017, 107 (7), 1858–1903.

Myers, Adam, Coordination Failure, Unpublished Book Draft, 2021.

National Industrial Conference Board, “State Income Taxes,” Technical Report, National Industrial Conference Board 1930.

OECD, “Revenue Statistics: 1965-2001,” Technical Report, OECD 2002.

Penniman, Clara, State Income Taxation, Baltimore: Johns Hopkins University Press, 1980.

Rosenbloom, Joshua and William Sundstrom, “The Decline and Rise of Interstate Migration in the United States: Evidence from the IPUMS, 1850-1990,” in Alexander Field, ed., Research in Economic History, Elsevier, 2004, pp. 289–325.

Ruggles, Steven, Sarah Flood, Ronald Goeken, Josiah Grover, Erin Meyer, Jose Pacas, and Matthew Sobek, “IPUMS USA: Version 9.0.,” Technical Report, IPUMS 2019.

Russett, Bruce and John Oneal, Triangulating Peace, New York: Norton, 2001.

Schmidheiny, Kurt andMichaela Slotwinski, “Tax-InducedMobility: Evidence from a Foreigners’ Tax Scheme in Switzerland,” Journal of Public Economics, 2018, 167, 293–324.

Spitzer, Hugh, “AWashington State Income Tax—Again?,” University of Puget Sound Law Review, 1993, 16 (2), 515–570.

Suárez Serrato, Juan Carlos and Owen Zidar, “The Structure of State Corporate Taxation and its Impact on State Tax Revenues and Economic Activity,” Journal of Public Economics, 2018, 167, 158–176.

-- and Philippe Wingender, “Estimating Local Fiscal Multipliers,” Working Paper 22425, NBER July 2016.

Sun, Liyang and Sarah Abraham, “Estimating Dynamic Treatment Effects in Event Studies with Heterogeneous Treatment Effects,” Journal of Econometrics, 2021, 225 (2), 175–199.

Tinbergen, Jan, Shaping the World Economy: Suggestions for an International Economic Policy, New York: Twentieth Century Fund, 1962.

Wallis, John, “American Government Finance in the Long Run: 1790 to 1990,” Journal of Economic Perspectives, 2000, 14 (1), 61–82.

Warren, Willis, “A Brief History of Oregon’s Income Tax,” Oregon Historical Quarterly, 1937, 38 (2), 193–205.

Webb, Matthew, “Reworking Wild Bootstrap Based Inference for Clustered Errors, ”Working Paper 1315, Queen’s Economics Department 2014.

Wooldridge, Jeffrey, “Two-Way Fixed Effects, the Two-Way Mundlak Regression, and Difference in Differences Estimators,” Technical Report 2021.

Young, Cristobal, Charles Varner, Ithai Lurie, and Richard Prisinzano, “Millionaire Migration and Taxation of the Elite: Evidence from Administrative Data,” American Sociological Review, 2016, 81 (3), 421–446.