American Economic Journal:
Macroeconomics
ISSN 1945-7707 (Print) | ISSN 1945-7715 (Online)
Shopping for Lower Sales Tax Rates
American Economic Journal: Macroeconomics
vol. 13,
no. 3, July 2021
(pp. 209–50)
(Complimentary)
Abstract
Using comprehensive high-frequency state and local sales tax data, we show that shopping behavior 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, consumers adjust in many dimensions. They stock up on storable goods before taxes rise and increase online and cross-border shopping in both the short and long run. The difference between short- and long-run spending responses has important implications for the efficacy of using sales taxes for countercyclical policy and for the design of an optimal tax framework. 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 behavior is optimal in the presence of shopping trip fixed costs. The model successfully matches estimated short-run and long-run tax elasticities. We provide additional evidence in favor of this new shopping complementarity mechanism.Citation
Baker, Scott R., Stephanie Johnson, and Lorenz Kueng. 2021. "Shopping for Lower Sales Tax Rates." American Economic Journal: Macroeconomics 13 (3): 209–50. DOI: 10.1257/mac.20190026Additional Materials
JEL Classification
- E21 Macroeconomics: Consumption; Saving; Wealth
- E32 Business Fluctuations; Cycles
- G51 Household Finance: Household Saving, Borrowing, Debt, and Wealth
- H21 Taxation and Subsidies: Efficiency; Optimal Taxation
- H25 Business Taxes and Subsidies including sales and value-added (VAT)
- H71 State and Local Taxation, Subsidies, and Revenue