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Advances in Tax Policy: Market Power, Compliance, and Avoidance

Paper Session

Friday, Jan. 3, 2025 2:30 PM - 4:30 PM (PST)

Hilton San Francisco Union Square, Franciscan C
Hosted By: American Economic Association
  • Chair: David R. Agrawal, University of California-Irvine

Identifying Tax Compliance from Variation in Enforcement: Theory and Empirics

Andrew Bibler
,
University of Nevada-Las Vegas
Laura Grigolon
,
University of Mannheim
Keith Teltser
,
Georgia State University
Mark Tremblay
,
University of Nevada-Las Vegas

Abstract

Governments increasingly use changes in tax rules to combat evasion. We develop a general approach to point-identify tax compliance along with supply and demand elasticities; identification requires data on prices and quantities, variation in tax enforcement, and a demand or supply shifter. We illustrate our approach using data on Airbnb collection agreements, where full enforcement is achieved by shifting the tax burden away from hosts to renters via the platform. We find that taxes are paid on roughly zero to 3.5 percent of Airbnb transactions prior to enforcement.

Pass-through and Instrument Relevance: A Unified Framework for Falsifying Firm Conduct

Adam Dearing
,
Cornell University
Dan Quint
,
University of Wisconsin-Madison
Lorenzo Magnolfi
,
University of Wisconsin-Madison
Christopher Sullivan
,
University of Wisconsin-Madison
Sarah Waldfogel
,
University of Wisconsin-Madison

Abstract

We study the role of pass-through in distinguishing models of firm conduct. While direct measurement of pass-through has been used to perform inference on conduct (e.g., Sumner 1981), other approaches leverage instrument-based techniques (e.g., Berry and Haile, 2014). In this paper, we develop a framework for falsification that clarifies how differences in pass-through can distinguish oligopoly models. We show that instrument-based approaches generalize simple pass-through regressions, and that different features of the pass-through matrix underlie instrument relevance for falsification. In particular, we find that variation in tax rates permits falsification of a large class of models. To illustrate the practical relevance of our results, we examine how firms set prices in the legal marijuana market in Washington state. Building on descriptive evidence that retailers adopt simple rules-of-thumb where they price at twice marginal cost, we test a rule-of-thumb pricing model against the standard Bertrand pricing model. Strong instruments, including those constructed from state and local ad-valorem taxes, conclude for rule-of-thumb. The different pass-through implied by these models not only permits falsification, but also has consequences for counterfactual policy exercises. We find that rule-of-thumb implies lower optimal tax rates than Bertrand pricing.

Tax Design, Information, and Elasticities: Evidence from the French Wealth Tax

Bertrand Garbinti
,
CREST - ENSAE
Jonathan Goupille-Lebret
,
ENS de Lyon
Mathilde Munoz
,
University of California-Berkeley
Stefanie Stantcheva
,
Harvard University
Gabriel Zucman
,
Paris School of Economics

Abstract

We study a French wealth tax reform that starkly reduced the information some taxpayers must report to the tax authority. Using a new dynamic bunching approach we estimate the average response to the reform, the share of compliers, and the local average treatment effect. The annual wealth growth rate of treated taxpayers falls by 0.5 percentage points after the reform. This decline is likely due to increased evasion, as suggested by the sharp responses in self-reported wealth but not in third-party-reported incomes. The wealth tax base becomes more elastic post reform, illustrating the key role of information policy choices for tax base elasticities.

Cross-Border Shopping in a Post-Wayfair World: Evidence from Foot-Traffic Data

Alannah Shute
,
University of Tennessee

Abstract

The sales tax is the second-largest source of revenue for state and local governments behind only the property tax. It is best for the sales tax to have a large base and a low rate. However, the size of the sales tax base has eroded over time with the rise of tax-exempt online shopping. The 2018 decision in Wayfair v. South Dakota allowed states to require that firms collect and remit the sales tax based on economic presence rather than physical presence. This change in remittance rules for online purchases removed the internet tax haven, but consumers are still able to lessen their tax burden by shopping across state and local borders. In this paper, I use foot-traffic data to examine how changes in sales tax remittance rules have affected consumer behavior. Using a staggered difference-in-difference framework, I compare visits to retail locations between shoppers from higher-tax jurisdictions and same- or lower-tax jurisdictions before and after economic nexus in the higher-tax jurisdiction. I expect to find that these changes have contributed to an increase in cross-border shopping, particularly along borders where tax differentials are highest. Although economic nexus increases the size of the tax base by removing a tax haven, the existence of tax differentials across borders likely continues to be a method of tax avoidance.

The Cost of Curbing Externalities with Market Power: Alcohol Regulations and Tax Alternatives

Chistopher Conlon
,
New York University
Nirupama Rao
,
University of Michigan

Abstract

Products with negative externalities are often subject to regulations that limit competition. The single-product case may suggest that it is irrelevant for aggregate welfare whether output is restricted via corrective taxes or limiting competition. However, when products are differentiated curbing consumption through market power can be costly. Firms with market power may not only reduce total quantity, but distort the purchase decisions of inframarginal consumers. We examine a common regulation known as post-and-hold (PH) used by a dozen states for the sale of alcoholic beverages. Theoretically, PH eliminates competitive incentives among wholesalers selling identical products. We assemble unique data on distilled spirits from Connecticut, including matched manufacturer and wholesaler prices, to evaluate the welfare consequences of PH. For similar levels of ethanol consumption, PH leads to substantially lower consumer welfare (and government revenue) compared to excise, sales or Ramsey taxes by distorting consumption choices away from high-quality/premium brands and towards low-quality brands. Replacing PH with volumetric or ethanol-based taxes could reduce consumption by over 9% without reducing consumer surplus, and increase tax revenues by over 300%.
JEL Classifications
  • H2 - Taxation, Subsidies, and Revenue
  • L1 - Market Structure, Firm Strategy, and Market Performance