Do sales tax credits stimulate the automobile market?
AbstractIn this paper, we quantitatively investigate the effectiveness of a sales tax reduction in stimulating sales and profits of durable goods manufacturers. Our question is motivated by policy makers' recent interest in helping ailing automobile manufacturers and in replacing a fleet of highly polluting vehicles. President Obama's economic stimulus plan, for instance, has directly targeted the primary market by including a sales tax credit on purchases of new cars and trucks. In this paper, we show that the benefit of reducing the sales tax, measured by its effect on firms' profits and sales, greatly decreases with the product's durability. The magnitude of our findings indicates that one must carefully account for durability and firms' behavior when evaluating such policies. Our findings are robust when we vary key parameters of the market.
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Bibliographic InfoArticle provided by Elsevier in its journal International Journal of Industrial Organization.
Volume (Year): 28 (2010)
Issue (Month): 4 (July)
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Web page: http://www.elsevier.com/locate/inca/505551
Sales tax Durable goods Oligopoly Time consistency Secondary markets Automobile industry;
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