Abstract

https://ssrn.com/abstract=2178753
 
 

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Consumption Responses to Temporary Tax Incentives: Evidence from State Sales Holidays


Sumit Agarwal


Georgetown University - Department of Finance

Nathan Marwell


University of Wisconsin - Madison

Leslie McGranahan


Federal Reserve Bank of Chicago

May 1, 2013


Abstract:     
Every year many states offer sales tax holidays (STHs) temporarily exempting items like clothes, shoes and school supplies from the state sales tax. We use two data sets, the Diary portion of the Consumer Expenditure Survey and a unique data set of credit cards transactions, to investigate the spending response to these temporary tax changes. Using a diff-in-diff methodology, we find substantial increases in spending on covered goods during these holidays that are not offset by declines in either spending on other goods or spending before or after the holidays. These spending responses are larger among households with children and limited to children’s apparel. Robustness checks suggest that these findings are not driven by unobserved seasonal demand shocks. Further, our computed price elasticities are orders of magnitude larger than those found previously in the literature, suggesting a behavorial response motivated by additional incentives than the small price changes resulting from the STH.

Number of Pages in PDF File: 53

Keywords: Consumption, State Sales Tax Holidays, Back to School, Credit Cards, Household Finance, Shopping, Spending

JEL Classification: D12, E21, E51, G21, H20, H71, L81


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Date posted: November 20, 2012 ; Last revised: June 14, 2013

Suggested Citation

Agarwal, Sumit and Marwell, Nathan and McGranahan, Leslie, Consumption Responses to Temporary Tax Incentives: Evidence from State Sales Holidays (May 1, 2013). Available at SSRN: https://ssrn.com/abstract=2178753 or http://dx.doi.org/10.2139/ssrn.2178753

Contact Information

Sumit Agarwal (Contact Author)
Georgetown University - Department of Finance ( email )
3700 O Street, NW
Washington, DC 20057
United States
202-687-8207 (Phone)
HOME PAGE: http://www.ushakrisna.com

Nathan Marwell
University of Wisconsin - Madison ( email )
716 Langdon Street
Madison, WI 53706-1481
United States
Leslie McGranahan
Federal Reserve Bank of Chicago ( email )
230 South LaSalle Street
Chicago, IL 60604
United States
312-322-5023 (Phone)
312-322-2357 (Fax)
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