Econ 551 Government Finance: Revenues Fall...
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ECON 551: Lecture 6b 1 of 16 Econ 551 Government Finance: Revenues Fall 2019 Given by Kevin Milligan Vancouver School of Economics University of British Columbia Lecture 6b: Tax Incidence, Empirics
Transcript of Econ 551 Government Finance: Revenues Fall...
ECON 551: Lecture 6b 1 of 16
Econ 551
Government Finance: Revenues
Fall 2019
Given by Kevin Milligan
Vancouver School of Economics
University of British Columbia
Lecture 6b: Tax Incidence, Empirics
ECON 551: Lecture 6b 2 of 16
Agenda:
We will go over some recent empirical contributions to get a sense of the state of the empirical
literature:
What questions are they asking?
What models are they testing?
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Why might tax incidence vary from ‘textbook’ predictions?
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Why might tax incidence vary from ‘textbook’ predictions?
Imperfect competition: Weyland and Fabinger JPE 2013, Carbonnier 2007
Salience: Chetty/Looney/Kroft AER 2009. Finkelstein QJE2009, Feldman/Ruffle AEJ 2015
Rigidities / adjustment costs:
Bargaining power: Besley/Meads/Surico JPubE 2014
Dynamics / Search frictions: Sallee AEJ 2011
Evasion / administration: Kopczuk et al 2016
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Kopczuk Marion Muehlegger Slemrod (2016 AEJ-Policy)
“ Does Tax-Collection Invariance Hold? Evasion and the Pass-Through of State Diesel
Taxes” http://dx.doi.org/10.1257/pol.20140271
Does ‘statutory tax invariance’ hold?
Does pass-through depend whether the tax is collected by wholesalers or retailers?
Study the case of diesel taxes.
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Diesel taxation
States impose fuel taxes that differ in rate and where it is collected (e,g, retail vs wholesale).
Varies 8 to 35 cents / gallon across states.
Over time state fuel taxes have moved ‘up’ the supply chain; further from consumers.
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Diesel taxation
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Diesel taxation: differential evasion
How could you evade diesel taxation?
Mis-report intended use.
o Highway, home heating, industry, agriculture untaxed.
o Dyed fuel for agriculture….
Mis-reporting tax collected.
o Distributor doesn’t remit tax that is collected
o Distributor conducts a series of transactions to obfuscate.
Bootlegging
o Get a lower rate for diesel intended for export; then sell within-state.
o Apportioned taxes for truckers; misreport miles driven.
o Exploit native American reservations.
Question: For tax authorities, who is easier to monitor?
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ECON 551: Lecture 6b 10 of 16
Notes on results…
First column says that a penny increase in tax leads to a 0.086 drop in tax exclusive price. So,
92.4% of tax increase is passed through to consumers; firms bear little burden. Big pass
through!
2nd column says that prices are higher when tax collected from supplier or distributor rather
than retail. Largely significant.
3rd column says pass-through is higher when tax is levied higher up the supply chain.
Robustness checks:
Degree of competition.
Other input cost pass through.
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Tax administration Example 2: ‘Hidden’ vs ‘Shown’ Sales Tax
“Salience and Taxation: Theory and Evidence”
Raj Chetty, Adam Looney, and Kory Kroft
American Economic Review, Vol. 99, No. 4, pp. 1145-1177.
Paper studies the impact of perception on taxation and decision making.
Question: Does tax inclusive pricing matter?
Tax exclusive pricing: price tags show the pre-tax price.
Tax inclusive pricing: price tags show the after-tax price.
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The Experiment
In a typical grocery store, they conduct the following experiment:
Take the product categories of cosmetics, hair care accessories, and deodorants
For two weeks, post special price tags with inclusive pricing.
Compare to other product categories.
Compare to a previous 6 weeks.
Compare to another store with no experiment.
Also did a survey of customers:
About 80% know the tax rate of 7.375%
Customers quite knowledgeable about what is taxed and what is not.
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Price Tag Changes: Hairbrushes
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The Impact: Sales Down!
Difference in Difference: 2.14/25.17 = 8.5% down.
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Explanations for sales drop
Unaware of taxes?
Survey they provided suggests people are aware.
‘Rational’ inattention?
Maybe time / psychic effort is costly and it isn’t worth the cost to worry abou the calculations.
How could we test this hypothesis?
Psychology: cues
Brain is distracted by other cues (shape, colour, marketing) and we are distracted from price
calculations.
How could we test this hypothesis?
ECON 551: Lecture 6b 16 of 16
Next Class:
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