Shopping for Lower Sales Tax Rates / Scott R. Baker, Stephanie Johnson, Lorenz Kueng.

Format:

Book

Author/Creator:

Baker, Scott R.

Contributor:

National Bureau of Economic Research.

Johnson, Stephanie.

Kueng, Lorenz.

Series:

Working Paper Series (National Bureau of Economic Research) no. w23665.

NBER working paper series no. w23665

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2017.

Summary:

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 differences between short- and long-run spending responses have important implications for the efficacy of using sales taxes for counter-cyclical 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 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 an implied after-tax reservation wage of $7-10. We provide additional evidence in favor of this new shopping-complementarity mechanism.

Notes:

Print version record

August 2017.