This paper shows that an economic slump can induce a government to invest in fiscal capacity. Large negative income shocks stress the revenue-raising capability of narrow tax bases, making an increase in tax base breadth desirable relative to its fixed implementation cost. A broader tax base enables revenue to be raised at lower tax rates, and so lower deadweight loss. The behavior of US state governments during the Great Depression supports the model: states experiencing larger than average negative income shocks were more likely to adopt a retail sales tax than were states experiencing smaller than average income shocks.
"Do Output Contractions Cause Investment in Fiscal Capacity?"
American Economic Journal: Economic Policy,
Business Fluctuations; Cycles
Business Taxes and Subsidies including sales and value-added (VAT)
State and Local Taxation, Subsidies, and Revenue
Economic History: Government, War, Law, International Relations, and Regulation: U.S.; Canada: 1913-
Regional and Urban History: U.S.; Canada: 1913-