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Shopping for Lower Sales Tax Rates

Listed author(s):
  • Scott R. Baker
  • Stephanie Johnson
  • Lorenz Kueng

Using comprehensive high-frequency state and local sales tax data, we show that household spending responds strongly to changes in sales tax rates. Even though sales taxes are not observed in posted prices and have a wide range of rates and exemptions, households adjust in many dimensions, stocking up on storable goods before taxes rise and increasing online and cross-border shopping. Interestingly, households adjust spending similarly for both taxable and tax-exempt goods. We embed an inventory problem into a continuous-time consumption-savings model and demonstrate that this seemingly irrational behavior is optimal in the presence of shopping trip fixed costs. The model successfully matches estimated short-run and long-run tax elasticities with a reasonable implied reservation wage of $7-10. We provide additional empirical evidence in favor of this new shopping-complementarity mechanism. While our results reject non-salience of sales tax changes, on average, we also show that upcoming tax changes that are more salient prompt larger responses.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 23665.

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Date of creation: Aug 2017
Handle: RePEc:nbr:nberwo:23665
Note: EFG IO ME PE
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  1. Liran Einav & Ephraim Leibtag & Aviv Nevo, 2010. "Recording discrepancies in Nielsen Homescan data: Are they present and do they matter?," Quantitative Marketing and Economics (QME), Springer, vol. 8(2), pages 207-239, June.
  2. D'Acunto, Francesco & Hoang, Daniel & Weber, Michael, 2016. "The effect of unconventional fiscal policy on consumption expenditure," Working Paper Series in Economics 94, Karlsruhe Institute of Technology (KIT), Department of Economics and Business Engineering.
  3. Chen, Xiu & Kaiser, Harry M. & Rickard, Bradley J., 2014. "The Salience of Excise vs. Sales Taxes on Healthy Eating: An Experimental Study," Working Papers 180111, Cornell University, Department of Applied Economics and Management.
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