Is Altering the Tax Base Different then Changing the Tax Rate?

Abstract

When designing a tax system, governments determine tax bases and tax rates, yet most research in public economics focuses on the tax rate. Using border pair identification and the Kilts Nielsen Retail Scanner data set, I estimate the effect of both changing the rate at which food is taxed and the choice to include food in the retail sales tax base. Overall, I find that reductions in the food tax rate modestly reduce the sale of food:a 1 percentage point increase in the gross tax rate on food reduces sales by 0.8 percent in my primary specification. Then using a generalized difference-in-difference specification, I find that the removal of food from the tax base does not appear to have any additional effects on the sale of food except via the rate reduction. These results suggest that consumers treat the change in the tax base as an equivalent rate reduction.

Keywords: indirect taxation, cross-border shopping, food taxation

JEL Classification: H71, H73, R50