Exploring effective paths to increase the share of labor income is of great significance for achieving high-quality economic development and promoting common prosperity. The reform of the fiscal and taxation system is a crucial institutional arrangement for regulating factor income distribution, and the independence of collection and administration agencies directly affects the implementation effectiveness of tax policies. However, how this key institutional factor specifically affects the pattern of factor income distribution remains to be thoroughly investigated. Leveraging the quasi-natural experimental setting created by the merger of national and local tax agencies, this paper employs a DID model to examine the impact of strengthened tax administration independence on corporate labor income share and its underlying mechanisms. The results indicate that greater tax administration independence significantly raises corporate labor income share, with mitigated local government intervention and reduced corporate tax avoidance being two key transmission mechanisms. The findings still hold after a series of robustness tests. Heterogeneity analysis reveals that the positive relationship between tax administration independence and corporate labor income share is more pronounced in capital-intensive firms, as well as in regions with highly-skilled tax personnel and higher tax burdens. Further research shows that the increase is significant for both executives and employees, leading to extensive benefits for the workforce. Furthermore, this policy significantly boosts the growth rate of average compensation for employees, confirming that the distributional benefits of strengthened tax administration independence are distinctly inclusive. The conclusion establishes a concrete link between the major national strategies of “deepening the fiscal and tax system reform” and “promoting common prosperity”, offering valuable policy insights for advancing a high-quality fiscal system and fostering common prosperity.