Applied Public Economics Tax Incidence PDF

Applied Public Economics Tax Incidence Michael Gerfin Steuerinzidenz bezieht sich auf die Frage, wer die Steuerlast einer bestimmten Steuer trägt bzw. inwieweit eine Steuer auf den Endver- brauc...

Applied Public Economics Tax Incidence Michael Gerfin Steuerinzidenz bezieht sich auf die Frage, wer die Steuerlast einer bestimmten Steuer trägt bzw. inwieweit eine Steuer auf den Endver- braucher überwälzt werden kann. Nicht derjenige, der die Steuer zahlt / an das University of Bern Finanzamt abführt, ist auch immer der, der die Steuer letztlich trägt bzw. durch diese belastet wird. Spring 2024 Die Frage ist deshalb bei der Analyse von Steuerwirkungen nicht, wer eine Steuer formal trägt, sondern wer sie wirtschaftlich trägt. Der Staat kann dies weniger steuern, als ihm lieb ist; wie die Steuerlast verteilt wird, ergibt sich aus dem Markt, z. B. dem Wettbewerb und den Preiselastizitäten.  Contents 1. Introduction 2. Partial Equilibrium Incidence 3. Tax Incidence: Empirical Applications 4. Tax Incidence with Salience E↵ects 2 / 49  Introduction Introduction Tax incidence is the study of the e↵ects of tax policies on prices price changes are functions of supply and demand curves these depend on production and utility functions hence price changes induced by taxes have impact on producer and consumer rents What the law says ~ Economic and statutory incidence are equivalent when prices are constant What happens to market prices when a tax is introduced or changed? Increase tax on cigarettes by $1 per pack Introduction of Earned Income Tax Credit (EITC) Food stamps program Thuge project in US E↵ect on price ! distributional e↵ects on smokers, profits of producers, shareholders, farmers,... 3 / 49  Introduction Introduction to th we want measure - - Tax incidence is an example of positive analysis Typically the first step in policy evaluation An input into thinking about policies that maximize social welfare Theory is informative about signs and comparative statics but is inconclusive about magnitudes Incidence of cigarette tax: elasticity of demand w.r.t. price is crucial Labor vs. capital taxation: mobility of labor, capital are critical 4 / 49  Partial Equilibrium Incidence 1. Introduction 2. Partial Equilibrium Incidence 3. Tax Incidence: Empirical Applications 4. Tax Incidence with Salience E↵ects 5 / 49  Partial Equilibrium Incidence Partial Equilibrium Model: Setup Two goods: x and y Verbrauchssteuer Government levies an excise tax on good x ~ Ex : you pay 1 Dollar for each pac of cigarette Excise or specific tax: levied on a quantity (e.g. gallon, pack) Ad-valorem tax: fraction of prices (e.g. sales tax) Let p denote the pre-tax price of x and q = p + t denote the tax inclusive price of x Good y, the numeraire, is untaxed > - Py = 1 Perfect competition ! firms are price-taking 6 / 49  Partial Equilibrium Incidence Partial Equilibrium Model: Demand Consumer has wealth Z and utility function u(x, y) Utility maximization gives demand D as a function of price q, D(q) @D q @ log D Let "D = @q D(q) = @ log q denote the price elasticity of demand L D = percentage change in quantity percentage change in prices 7 / 49  Partial Equilibrium Incidence Partial Equilibrium Model: Supply Producers use y to produce x Production function is concave, so marginal cost of producing x is increasing With perfect optimization, profit maximization gives supply S as a function of pre-tax price p, S(p) (because the tax will never be part of profit) @S p Let "S = @p S(p) denote the price elasticity of supply Elasticities are the things want to study > - we 8 / 49  Partial Equilibrium Incidence Partial Equilibrium Model: Equilibrium The equilibrium condition Q = S(p) = D(p + t) defines p as a function of t, p(t) ~ depends on the two elasticities dp Goal of analysis: characterize dt , the e↵ect of a tax on price First consider some graphical examples to build intuition, then analytically derive formula 9 / 49  Partial Equilibrium Incidence Graphical Example I t = 7 , 50$ p +t I start to Willingness P pay goes down by 7 , 50 I producer p lost) - = Incidence looks at the changes > price not the - quantity changes 10 / 49  Partial Equilibrium Incidence Graphical Example II cost increase by E Marginal and S MC ↑ = - Start nct - > Doesn't matter law ! - who has to the tax by pay 11 / 49  Partial Equilibrium Incidence Formula for Tax Incidence Implicitly di↵erentiate equilibrium condition 9 - dD dS D(p(t) + t) = S(p(t)) dt = dt to obtain incidence on producers: Pi & Demand 2DdP at da at elasticity is dp @D 1 crucial dt = @S @p ( @p @D D'(d 1) + s( @p ) = T ) dp = " D D = (S - D)d dt "S "D = dp dt Incidence on consumers is: ~ supply elasticity dq dp "S is crucial =1+ = dt dt "S "D 9 p(t) = + t 12 / 49  Partial Equilibrium Incidence Formula for Tax Incidence in a Picture /Producer do not change the slope of the price two curves - 13 / 49  Empirical Applications 1. Introduction 2. Partial Equilibrium Incidence 3. Tax Incidence: Empirical Applications 4. Tax Incidence with Salience E↵ects 14 / 49  Empirical Applications Applications 1 Doyle and Samphantharak (2008), $2.00 Gas! Studying the e↵ects of a gas tax moratorium, Journal of Public Economics 2 Hastings and Washington (2010), The First of the Month E↵ect: Consumer Behavior and Store Responses, AEJ: Econ. Policy More examples are in the exercises 15 / 49  Empirical Applications Doyle and Samphantharak, 2008 Question: who bears the burden of the gas tax? Setting: Gas prices spike above $2.00 in 2000, near election, political desire to provide tax relief November get ride off" " Repeal and subsequent reinstatement of sales tax in Indiana and Illinois Reforms known to be temporary and timing of reinstatement was known ex-ante Exogenous change, independent of market price 16 / 49  Empirical Applications Doyle and Samphantharak, 2008 Homogeneous product (no quality di↵erences) Highly important tax: total revenue in the US 8 billion $ per year (EIA, 2005) Fall and rise in price ! potential asymmetries in response can be identified E↵ects on retail prices and cross-border competition & gore this for class 17 / 49  Empirical Applications Doyle and Samphantharak, 2008 Institutional Background Election year in Indiana (IN) plus exceptional gas prices Governor of IN declares energy emergency IN suspends 5% sales tax on gas starting July 1 for 60 days Suspension was extended three times and tax was reinstated on Oct 30 Gas prices had already fallen in September which suggests that reinstatement was not tied to market conditions Illinois (IL) suspends 5% sales tax on gas starting July 1, reinstates on Dec 31 18 / 49  Empirical Applications Doyle and Samphantharak, 2008 Institutional Background Excise taxes were not a↵ected by the moratorium Sales tax is levied from the retailer Posted gas prices include any taxes (salient tax) Station owners can deduct excise tax from the tax base when computing the sales tax Sales tax applies to ca. 90% (80%) of posted price in IL (IN) Full-shifting therefore implies 4.5% change in price in IL and 4% I change in prices in IN Gas stations fully shift the tax cut to the consumers IL only · : 90 % are affected -> fully shifting implies 5% 0 9. = 4 1 5% 19 / 49  Empirical Applications Empirical Approach Di↵erence-in-Di↵erence estimation comparing treated states with neighboring states (MI, OH, MO, IA, WI) There should be a sharp discontinuity at the time of tax repeal and reinstatement Start with graphical evidence Next consider regression equation (controls for area characteristics X , brand FE), s = station, b = brand, t=time, P = retail price, W SP = whole sale price 100 ln Pbst = 0 + 1 T reated + 2 P ostref orm + 3 (T reated · P ostref orm) S Treatment + 4 ln(W SP )s + 5 X + b + "bst effect of this reform 20 / 49  Empirical Applications Graphical Analysis: E↵ect of tax repeal Reform immediate increase in the ~ difference Local linear regression of di↵erence in log prices (IL,IN vs. neighbors) E↵ect of about -2.7% 21 / 49  Empirical Applications Graphical Analysis: E↵ect of tax increase IN Reinstatement Reinstatement Prices rose by about 4% (2.8%) in IN (IL) 22 / 49  Empirical Applications Di↵-in-Di↵ Results: Tax-Repeal = 3/not - 4 or 415% 23 / 49  Empirical Applications Di↵-in-Di↵ Results: Tax-Repeal 3 /0.04 = 0.72 (IN) and 3 /0.045 = 0.64 (IL) measures relative incidence Estimated e↵ects imply an approx. 70% pass-through rate (70% of the tax decrease reflected in lower price for consumers) ( The elasticity of demand is thought to be in range from -0.05 to Eminement -0.25 (Hughes et al., 2006) Tonnen Recall that dq "S dqdt = ) "S = "D dt ("S "D ) (1 dqdt) A pass-through rate of 0.7 implies a supply elasticity in the range of 0.1 0.6 mants will 24 / 49  Empirical Applications Hastings and Washington 2010 Question: How does food stamps subsidy a↵ect grocery store pricing? Will they increase the prices be higher income Inotthe idea at consumer have a Food stamps typically arrive at the same time for a large group of people, e.g. first of the month Use this variation to study: 1 Whether demand changes at beginning of month (violating permanent income hypothesis) 2 How much of the food stamp benefit is taken by firms by increased prices rather than consumers (intended recipients) 25 / 49  Empirical Applications Hastings and Washington: Data Scanner data from several grocery stores in Nevada Data from stores in high-poverty areas (> 15% food stamp recipients) and in low-poverty areas (