Shopping for Lower Sales Tax Rates

67 Pages Posted: 6 Jan 2017 Last revised: 14 May 2020

See all articles by Scott R. Baker

Scott R. Baker

Northwestern University, Kellogg School of Management, Department of Finance; National Bureau of Economic Research (NBER)

Stephanie Johnson

Rice University, Jones School of Business

Lorenz Kueng

University of Lugano - Faculty of Economics; Swiss Finance Institute; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: April 20, 2020

Abstract

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 difference between short- and long-run spending responses has 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 behavior is optimal in the presence of shopping trip fixed costs. The model successfully matches estimated short-run and long-run tax elasticities. We provide additional evidence in favor of this new shopping-complementarity mechanism.

Keywords: shopping complementarity, consumer spending, intertemporal substitution, tax salience

JEL Classification: D12, D14, D15, D83, E21, G51, H21, H26, H31, H71

Suggested Citation

Baker, Scott R. and Johnson, Stephanie and Kueng, Lorenz, Shopping for Lower Sales Tax Rates (April 20, 2020). Available at SSRN: https://ssrn.com/abstract=2893738 or http://dx.doi.org/10.2139/ssrn.2893738

Scott R. Baker (Contact Author)

Northwestern University, Kellogg School of Management, Department of Finance ( email )

Evanston, IL 60208
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Stephanie Johnson

Rice University, Jones School of Business ( email )

Lorenz Kueng

University of Lugano - Faculty of Economics

Via Giuseppe Buffi 13
Lugano, TI 6904
Switzerland

HOME PAGE: http://www.usi.ch/en

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

HOME PAGE: http://www.sfi.ch/en/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

HOME PAGE: http://cepr.org/

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