Empirical Analysis of Consumption Taxes: Evidence From Micro-Data

Paper Session

Saturday, Jan. 7, 2017 2:30 PM – 4:30 PM

Hyatt Regency Chicago, Crystal C
Hosted By: American Economic Association
  • Chair: Tuomas Kosonen, Labour Institute for Economic Research

Firm Types, Price-Setting Strategies, and Consumption-Tax Incidence

Jarkko Harju
,
VATT Institute for Economic Research
Tuomas Kosonen
,
Labour Institute for Economic Research
Oskar Nordstrom Skans
,
Uppsala University

Abstract

Studying very detailed micro data on product-level price changes we show that independent and chain establishments display fundamentally different price setting behavior. Our analysis utilizes large restaurant VAT rate reductions in two different European countries. We show that price responses in the short and medium run were clustered around the two focal points of zero pass-through and a full pass-through. Furthermore, the distinction between independents and chains is a crucial predictor for the magnitude of the price incidence. While nearly all independent restaurants effectively ignored the tax reductions and left consumer prices unchanged, a substantial fraction of restaurants belonging to chains chose a rapid and complete pass-through. In the longer run, prices converged, but primarily through a price reversion among chain restaurants. This stark difference in the price change distributions cannot be explained by location, initial prices or other market-segment indicators such as meal or restaurant types. We also show number of results indicating that chains and independents behave differently in pricing strategies. First, chains are more likely to change their prices in normal times (i.e. when VAT-rates are fixed). Second, chains coordinate their price responses between sites. In contrast, price responses are not coordinated between restaurants from different chains or between independent restaurants that share location. Third, independents are much more likely to use round number prices than chains. In a broader context, it is striking that independents and chains behave so differently from each other on a first-order decision margin such as price setting. The results have grave implications for public finance literature in general, and for tax-incidence literature in particular.

The Welfare Effects of Commodity Taxation With Endogenous Product Variety: Theory and Evidence

Kory Kroft
,
University of Toronto
Matthew Notowidigdo
,
Northwestern University

Abstract

We develop a general framework for valuing changes in product variety. Our framework implies a general formula for the marginal welfare gain of increasing commodity taxes under imperfect competition. We<br />
implement the formula using detailed data on state sales taxes merged to Nielsen retail scanner data. The sales tax data provides statutory variation in tax rates between states as well as variation in sales<br />
tax exemptions across product categories between and within states. We use these sources of variation are used to identify the effect of sales taxes on average prices, expenditures, and product variety, and<br />
we use these estimated effects to calibrate our marginal welfare gain formula.

What Goes Up May Not Come Down: Asymmetric Passthrough of Consumption Taxes

Youssef Benzarti
,
University of California-Los Angeles
Dorian Carloni
,
Congressional Budget Office

Abstract

This paper shows that prices respond asymmetrically to increases and decreases in consumption taxes. We combine monthly commodity price data with information on value added tax (VAT) rates across several European countries for the period 1996-2015 and show that prices respond more to VAT increases than to decreases. We explain this asymmetric pass-through to prices with a simple fairness argument based on the findings of Kahneman et al. 1986. Our finding cautions against using incidence estimates derived in previous studies without accounting for the direction of the tax change and questions the effectiveness of reductions in VAT to achieve redistribution or stimulate economic growth.
Discussant(s)
Alan Auerbach
,
University of California-Berkeley
Dorian Carloni
,
Congressional Budget Office
Justin Marion
,
University of California-Santa Cruz
JEL Classifications
  • H2 - Taxation, Subsidies, and Revenue
  • H3 - Fiscal Policies and Behavior of Economic Agents