Do More Efficient Taxes Lead to Bigger Government?: Evidence from the Introduction of Withholding for the State Personal Income Tax

49 Pages Posted: 21 Jun 2018

See all articles by Libor Dusek

Libor Dusek

Charles University, Faculty of Law; University of Economics, Prague

Sutirtha Bagchi

Villanova University - School of Business - Economics

Date Written: June 4, 2018

Abstract

This paper examines the claim that adopting more efficient taxes leads to bigger government by studying the introduction of withholding of the state personal income tax. We exploit the staggered adoption of withholding by individual states in the U.S. between 1948 and 1971 to construct a difference-in-differences style estimate and find that withholding immediately and permanently increased income tax collections by about 30 percent at given tax rates. Governments responded to this efficiency shock, the major response being a shift in the composition of revenues towards a heavier reliance on the personal income tax. States also increased revenues from other taxes as they implemented withholding, which suggests that a need to raise more revenue was an important motive for adopting withholding. The evidence we obtain suggests that withholding resulted in a one-time increase in personal income tax revenues but did not change the growth rate of revenues by itself.

Keywords: political economy of taxation, size of government, third-party reporting, withholding

JEL Classification: H11, H21, H26, H71, N42

Suggested Citation

Dusek, Libor and Bagchi, Sutirtha, Do More Efficient Taxes Lead to Bigger Government?: Evidence from the Introduction of Withholding for the State Personal Income Tax (June 4, 2018). Available at SSRN: https://ssrn.com/abstract=3191164 or http://dx.doi.org/10.2139/ssrn.3191164

Libor Dusek

Charles University, Faculty of Law ( email )

nam. Curieovych 7
Prague 1, 11640
Czech Republic

University of Economics, Prague ( email )

nam. W.Churchilla 4
Prague 3, 130 67
Czech Republic

Sutirtha Bagchi (Contact Author)

Villanova University - School of Business - Economics ( email )

United States

HOME PAGE: https://sites.google.com/site/sutirthabagchi/

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