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Parametric and Nonparametric Analysis of Tax Changes

Author

Listed:
  • James Bugden
  • Iain Fraser
  • Jeffrey S. Racine
  • Robert Waschik

Abstract

In this paper we examine the net effect of several major tax changes in Australia on residential property prices. Specifically, we consider the announcement and introduction effects that resulted from several policy changes including the introduction of the Goods and Services Tax (GST) and the accompanying First Home Owner Grant (FHOG). Using a large data set of residential property sales in Melbourne, Australia, between 1992 and 2002 we estimate various models using parametric and nonparametric methods. While our parametric models suggest that the tax policy changes appear to have a statistically significant impact on house prices, no economically significant impact is detected by our nonparametric models, nor (upon closer inspection) by the parametric models themselves. Given the enormity of the sample size, this provides a telling example of the fundamental difference between statistical and economic significance and its implications for detecting government policy effectiveness.

Suggested Citation

  • James Bugden & Iain Fraser & Jeffrey S. Racine & Robert Waschik, 2014. "Parametric and Nonparametric Analysis of Tax Changes," Department of Economics Working Papers 2014-02, McMaster University.
    • Handle: RePEc:mcm:deptwp:2014-02
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    File URL: http://socserv.mcmaster.ca/econ/rsrch/papers/archive/2014-02.pdf
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    References listed on IDEAS

    as
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    7. Productivity Commission, 2004. "First Home Ownership," Others 0410007, University Library of Munich, Germany.
    8. Racine, Jeff & Li, Qi, 2004. "Nonparametric estimation of regression functions with both categorical and continuous data," Journal of Econometrics, Elsevier, vol. 119(1), pages 99-130, March.
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    More about this item

    Keywords

    tax changes; housing; nonparametric methods; hedonic model;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand

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