LT 1 - Tax Incidence Flashcards
Partial equilibrium definitions
Define:
1) Price elasticity of demand
2) Price elasticity of supply
3) Firm’s profit
State and prove:
Partial equilibrium incidence formula
Show that:
The side on which the tax is levied does not matter
**See Problem Set 1
Graphically show that the side on which tax is levied does not matter
3 Lessons from traditional model of tax incidence
**Use an empirical application to explain:
To what extent is a tax passed through to consumers
Doyle & Samphantharak (2007)
Key assumptions of standard price equilibrium (PE) incidence models
Use an empirical application to explain “salience of taxes affects behavioral responses to taxes”
Explain:
1) Strategies
2) Implications
Chetty & al (2009), Finkelstein (2009)
Two empirical strategies
1. Manipulate tax salience:
- Make tax as visible as pre-tax price
- If people are already fully aware of taxes, should have no effect on demand
- Strategy:
- Experience manipulating tax salience at supermarkets of a big grocery chain
- Post tax inclusive price tags on shelf for subset of products in selected store
- Use scanner data to track prices and weekly quantities sold by product
- Note: not a double randomisation, therefore use pre / post data in treatment and control to control for unobserved fixed differences across products and store
- In effect, an experimental diff-in-diff
- Result: 8 percent reduction in demand from posting after-tax prices
- Manipulate tax rates:
- Compare changes in prices to changes in tax rates when tax rates are not included in retail price
- Strategy:
- Concern with strategy 1= “Hawthorne effect”
- Strategy 2: compare directly effects of price changes and tax changes
- Use structure of alcohol taxes in US states
- Excise tax: included in posted price
- Sales tax: added at register
- Research design: standard two-way US state*time fixed effects/difference-in-differences design, separately for state excise vs sales taxes
- Show that across state elasticities of alchohol consumption stronger for excise tax than for sales tax
Implications for Incidence Theory
- Inattention leads to a more inelastic behavioral response, increasing incidence on the inattentive group (consumers in CLK)
- Salience/information frictions can break the classic result that statu- tory incidence is irrelevant for economic incidence. Intuition:
- If consumers were remitting the tax themselves, presumably they would be more attentive/elastic
- If statutory incidence affects relative elasticity of supply/demand then it affects the economic incidence of the tax.
- Why do you think US retailers exclude sales taxes from posted prices in the first place?
Explain:
Incidence with imperfect competition
Graphically show:
Imperfect competition: Monopsony
Explain:
Monopsony & Incidence of Minimum wage
Graphically show:
The effect of raising minimum wage in monopsony
Use empirical evidences to explain minimum wage incidence on:
1) Local case studies
2) National-level studies
3) Monopsony model
4) Age discontinuity in Danish minimum wage rules
What does general equilibrium model consider that is different from partial equilibrium incidence?
Explain why:
Incidence is “shifted backward” to capital and labour
– Capital, in contrast, is perfectly inelastic: you cannot pick up the restaurant and move it in the short run.
– To understand who bears incidence, consider markets for these in- puts and likely relative elasticities
In the short and long run, who bears tax?
(Revise question)
Conclusion
(Revise question)
Partial equilibrium incidence formula
Graphically show tax incidence levied on consumers
Graphically show tax incidence levied on producers
Graphically show tax incidence:perfectly inelastic demand (rigid demand)
Graphically show tax incidence: perfectly elastic demand
