Econ 551 Government Finance: Revenues Fall 2019 Given by Kevin - - PowerPoint PPT Presentation

ECON 551: Lecture 6b 1 of 16

Econ 551 Government Finance: Revenues Fall 2019

Given by Kevin Milligan Vancouver School of Economics University of British Columbia Lecture 6b: Tax Incidence, Empirics

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Agenda:

We will go over some recent empirical contributions to get a sense of the state of the empirical literature:  What questions are they asking?  What models are they testing?

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Why might tax incidence vary from ‘textbook’ predictions?

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Why might tax incidence vary from ‘textbook’ predictions?

 Imperfect competition: Weyland and Fabinger JPE 2013, Carbonnier 2007  Salience: Chetty/Looney/Kroft AER 2009. Finkelstein QJE2009, Feldman/Ruffle AEJ 2015  Rigidities / adjustment costs:  Bargaining power: Besley/Meads/Surico JPubE 2014  Dynamics / Search frictions: Sallee AEJ 2011  Evasion / administration: Kopczuk et al 2016

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Kopczuk Marion Muehlegger Slemrod (2016 AEJ-Policy)

“ Does Tax-Collection Invariance Hold? Evasion and the Pass-Through of State Diesel Taxes” http://dx.doi.org/10.1257/pol.20140271  Does ‘statutory tax invariance’ hold?  Does pass-through depend whether the tax is collected by wholesalers or retailers?  Study the case of diesel taxes.

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Diesel taxation

 States impose fuel taxes that differ in rate and where it is collected (e,g, retail vs wholesale). Varies 8 to 35 cents / gallon across states.  Over time state fuel taxes have moved ‘up’ the supply chain; further from consumers.

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Diesel taxation

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Diesel taxation: differential evasion

How could you evade diesel taxation?  Mis-report intended use.

• Highway, home heating, industry, agriculture untaxed.
• Dyed fuel for agriculture….

 Mis-reporting tax collected.

• Distributor doesn’t remit tax that is collected
• Distributor conducts a series of transactions to obfuscate.

 Bootlegging

• Get a lower rate for diesel intended for export; then sell within-state.
• Apportioned taxes for truckers; misreport miles driven.
• Exploit native American reservations.

Question: For tax authorities, who is easier to monitor?

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Notes on results…

 First column says that a penny increase in tax leads to a 0.086 drop in tax exclusive price. So, 92.4% of tax increase is passed through to consumers; firms bear little burden. Big pass through!  2nd column says that prices are higher when tax collected from supplier or distributor rather than retail. Largely significant.  3rd column says pass-through is higher when tax is levied higher up the supply chain. Robustness checks:  Degree of competition.  Other input cost pass through.

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Tax administration Example 2: ‘Hidden’ vs ‘Shown’ Sales Tax

“Salience and Taxation: Theory and Evidence” Raj Chetty, Adam Looney, and Kory Kroft American Economic Review, Vol. 99, No. 4, pp. 1145-1177. Paper studies the impact of perception on taxation and decision making. Question: Does tax inclusive pricing matter? Tax exclusive pricing: price tags show the pre-tax price. Tax inclusive pricing: price tags show the after-tax price.

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The Experiment

In a typical grocery store, they conduct the following experiment: Take the product categories of cosmetics, hair care accessories, and deodorants  For two weeks, post special price tags with inclusive pricing.  Compare to other product categories.  Compare to a previous 6 weeks.  Compare to another store with no experiment. Also did a survey of customers:  About 80% know the tax rate of 7.375%  Customers quite knowledgeable about what is taxed and what is not.

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Price Tag Changes: Hairbrushes

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The Impact: Sales Down!

Difference in Difference: 2.14/25.17 = 8.5% down.

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Explanations for sales drop

Unaware of taxes?  Survey they provided suggests people are aware. ‘Rational’ inattention?  Maybe time / psychic effort is costly and it isn’t worth the cost to worry abou the calculations.  How could we test this hypothesis? Psychology: cues  Brain is distracted by other cues (shape, colour, marketing) and we are distracted from price calculations.  How could we test this hypothesis?

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Next Class:

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