Cooperative Federalism: The Consequences of the Audit Information Exchange Agreements

Improving the efficiency of tax collection is essential for both development and fairness. This paper studies the Audit Information Exchange Agreements—partnerships between U.S. states and the federal government, signed between 1950 and 1971, to share data on income tax audits and enforcement techniques. Using difference-in-differences methods, I find that these agreements increased state income tax revenues by approximately 20%. I do not find evidence of a decline in population, on average. The findings are consistent with a spatial equilibrium model with costly migration in which evaders choose between compliance and relocation in response to increased enforcement salience.