Working Paper: NBER ID: w25502
Authors: Anders Jensen
Abstract: This paper studies how the transition from self-employment to employee-jobs over the long run of development explains growth in income tax capacity. I construct a new database which covers 100 household surveys across countries at different income levels and 140 years of historical data within the US (1870-2010). Using these data, I first establish four new stylized facts: 1) within country, the share of employees increases over the income distribution, and increases at all levels of income as a country develops; 2) the income tax exemption threshold moves down the income distribution as a country develops, tracking employee growth; 3) the employee share above the tax exemption threshold is maximized and remains constantly high; 4) movements in the tax exemption threshold account for the observed variation in tax collection across development. These findings are consistent with a model where a high employee share is a necessary condition for effective taxation and where the rise in income covered by information trails through increases in employee shares drives expansion of the income tax base. To provide a causal estimate of the impact of employee share on the exemption threshold, I study a state-led US development program implemented in the 1950s-60s which shifted up the level of employee share. The identification strategy exploits within-state changes in court-litigation status which generates quasi-experimental variation in the effective implementation date of the program. I find that the exogenous increase in employee share is associated with an expansion of the state income tax base and an increase in state income tax revenue.
Keywords: Tax Capacity; Employment Structure; Income Tax; Compliance; Development
JEL Codes: D31; H11; H21; H24; H26; H71; O15; O22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| exogenous increase in employee share (J39) | expansion of state income tax base (H29) |
| increase in employee share (J54) | decrease in exemption threshold (H26) |
| expansion of state income tax base (H29) | significant impact of enforcement costs on tax collection (H26) |