Sales Tax Rates Research Articles

The economic effects of tax structure transformation: A study based on the tax reform of China's hainan free trade port

Many developing countries use tax reform as a strategy to support national or regional development. China's tax reform of the Hainan Free Trade Port in 2025 serves this purpose. The reform replaces the existing VAT, consumption tax, vehicle purchase tax, urban maintenance and construction tax, and education fee ("four taxes and one fee") with a sales tax. Previous studies of tax structure reform have rarely addressed the economic impact of such a transition, and few sales tax studies have discussed the issue of optimal tax rates. To study the economic effects of the introduction of sales tax and to find the optimal tax rate, this paper uses the computable general equilibrium (CGE) model to conduct simulation analyses. It is found that the sales tax rate should be 17.16 % to keep the fiscal revenue of Hainan Province more or less unchanged after the ‘four taxes and one fee’ are simplified into sales tax. The total economic volume and sales tax rate show an inverted ‘U’ type relationship, the optimal sales tax rate is about 9.79 %, and the tax rate of GDP, investment, employment growth of 3.82 %, 0.35 %, 3.41 %, respectively, the manufacturing industry and other industries in most of the different degrees of growth. Therefore, we suggest that the average sales tax rate of Hainan Free Trade Port should be around 9.79 %.

Behavioural patterns of leaders versus followers in setting local sales tax policy

AbstractSales tax has been a popular revenue source for local governments in 38 US states. In this fiscal climate, both horizontal and vertical tax competition are frequently observed. Local governments are concerned about adverse impacts thereof on their revenue as mobile shoppers react to tax rate changes by purchasing in lower‐tax jurisdictions. So far, few studies have accounted for potential endogeneity in the behavioural patterns of leaders versus followers in setting local sales tax policy. Using a 40‐year panel dataset from Texas, this study identifies leader municipalities in changing sales tax rates and examines how municipalities asymmetrically respond to multi‐tiered rate changes. The findings depict a crowding‐out story in vertical tax competition and reveal crowding‐in effects in horizontal competition, with leader municipalities immune to both effects.

Large sample evidence on tipping rates in the restaurant industry: A comprehensive study

Using over 68 million guest checks from 43 brand-name restaurants across 1202 locations, this study provides a comprehensive investigation into the drivers of tipping behavior. We document that tipping rates are positively related to sales tax rates and elapsed dining time and are inversely related to discount rates and the relative busyness of the restaurant. This evidence implies that consumers tend to tip based on the post-tax bill net of any discounts and after considering the length of their dining experience and the relative busyness of the restaurant. We also find significant U-shaped relationships between tipping rates and discount rates and relative busyness, respectively, suggesting that their effects on tipping behavior are non-monotonic and perhaps more complex.

How Do Taxes on Car Sales Affect Television Advertising Strategies?

Many countries have leveraged sales tax to discourage (or encourage) consumption of socially undesirable (or desirable) products. This article uses several exogenous vehicle sales tax change events to examine the effect of the low-emission vehicle sales tax rate on automobile brands’ television advertising strategies. Empirical results suggest that companies exhibit procyclical advertising behavior in response to the external tax rate change. Moreover, the sales tax rate affects advertisers’ selection of television networks and advertising slots. These results have important economic consequences for the media market, as well as managerial implications for marketers, broadcasters, and policymakers.

Tax Salience and Cyclical Asymmetry in Tax Rate Adjustments: Testing the Indirect Tax Hypothesis

In this paper, we explore the hypothesis that politicians prefer using direct taxes with relatively high salience for tax cuts during booms, while they prefer using indirect taxes with relatively low salience for tax increases during recessions. Using a panel data set of U.S. states from 1992 to 2014, we analyzed how cyclical fluctuations in resource availability affect the statutory rates of five major state taxes: general sales tax, personal income tax, corporate income tax, and two excise taxes (gasoline and cigarette taxes). Our results suggest that cyclical improvements in resource availability during booms lead to reductions in personal income tax rates, whereas cyclical deteriorations in resource availability during recessions result in increases in general sales tax rates.

Shopping for Lower Sales Tax Rates

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 countercyclical 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. (JEL E21, E32, G51, H21, H25, H71)

Optimal consumer sales tax policies for online‐offline retail operations with consumer returns

AbstractMultichannel strategies are widely observed in practice. In some jurisdictions, the previously tax‐free online channel is now required to remit sales tax. Motivated by policy evolution and sales‐tax practices, we build analytical models to study the effects of sales tax on multichannel strategies and social welfare (which is defined as the overall surplus minus the negative external impact). We find that retailers prefer the online‐and‐offline channel to others when the product value is low relative to the consumer channel preference. If the offline sales tax rate is sufficiently high, the offline channel may simply function as the showroom. We also explore the optimal sales tax rate(t) that can maximize social welfare. We recognize that sales tax not only directly affects social welfare by influencing the optimal price (and service) decisions in the supply chain, but also indirectly affects social welfare through retailers' channel choice. In particular, imposing an online sales tax for low value products on small retailers only to transfer revenue from the retailers to the government; it is ineffective in increasing social welfare. We advise governments to develop sales tax policies based on consideration of channel type, product category, and the fit between the channel and product. Whereas an online tax free or a uniform tax rate fits low value products, setting different tax rates for different channels can be admissible for high value products. Counterintuitively, we also find that consumer showrooming may increase social welfare, as it reduces product returns (and the corresponding environmental impacts).

The effects of soda taxes on adolescent sugar intake and blood sugar.

Intake of added sugars is high in the US adolescent population, with sugar-sweetened beverages being the primary source. We contribute to the literature by providing the first estimates of the impacts of soda sales taxes, which are commonly levied in the US states, on the total daily sugar intake and blood sugar of adolescents aged 12-19 years. Using a restricted-use version of the 1999-2014 National Health and Nutrition Examination Survey (NHANES) and exploiting within-state variation in soda sales tax rates over time, our results indicate that adolescent soft drink demand is tax-sensitive. Consistent with prior research using NHANES data, we find that adolescents reduce calories consumed from soft drinks when faced with a rise in soda sales taxes, but they offset this reduction with an increase in calorie intake from milk drinks. In accordance with this substitution behavior, we find that soda sales taxes cause small and insignificant changes in the total daily calorie intake, total daily sugar intake, or blood sugar levels of adolescents.

PROPERTY SALES TAX AND BUYING INTEREST IN INDONESIA

The Surabaya city government still applies the old rules, which do not implement a reduction in property sales tax rates. Data from the Office of Revenue and Financial Management (DPPK) The Surabaya city government noted, in 2015 the revenue from property sales tax reached Rp 825 billion. This is the reason behind the Surabaya city government's refusal to reduce property sales tax rates. Based on this, we want to examine whether the policies taken by the Surabaya government to not reduce property sales tax rates can affect the interest of the purchasing power of the people of Surabaya. The population in this study were all people residing in the city of Surabaya. The data collection technique carried out by the researcher was a purposive sampling technique. In this study, researchers used questionnaires as data collection techniques. The results showed that the decision of the Surabaya city government to reject the decline in property sales tax rates did not affect the people's buying interest in property in Surabaya

Developing an Economic Model for Donations: Theoretical Analysis and Policy Implication

In developing an economic model for public donations, we applied the theory of consumer choice, and with the derived model, verified two propositions: 1) higher price elasticity of demand for a product may lead consumers to demand more for it but less for other products given the total budget; and 2) a tax return rate based on donations positively influences consumer well-being, while the sales tax rate negatively affects it. After looking at the policy implications of public school finance, we suggest that the government should increase the tax return rate based on public donations instead of increasing sales tax rate to collect more funding to finance public schools.

Do Household Finances Constrain Unconventional Fiscal Policy?

When the zero lower bound on nominal interest rate binds, monetary policy makers may lack traditional tools to stimulate aggregate demand. We investigate whether unconventional fiscal policy, in the form of pre-announced consumption tax changes, has the potential to meaningfully shift durables purchases intertemporally and how it is affected by consumer credit. In particular, we test whether car sales react in anticipation of future sales tax changes, leveraging 57 pre-announced changes in state sales tax rates from 1999-2017. We find evidence for substantial tax elasticities, with car sales rising by over 8% in the month before a 1% increase in the sales tax rate. Responses are heterogeneous across households and sensitive to supply of credit. Consumers with high credit risk scores are most able to pull purchases forward. At the same time, other effects such as customer composition and attention lead to an even larger tax elasticity during recessions, despite these credit frictions. We discuss policy implications and the likely magnitudes of tax changes necessary for any substantive long-term responses.

Food sales taxes and employment

AbstractWe use panel fixed effects estimation with a border approach creating cross‐border county pairs to identify changes in food sales tax rates on employment, payroll, and hiring. Results suggest food sales taxes have a negligible effect on overall employment but adverse effects in the food and beverage stores industry. We find younger workers, who are more likely to work in the food and beverage industry, are more adversely affected when a neighboring state has preferential tax treatment for food. We also determine that omitting food sales tax rates when studying general sales tax effects on employment does not bias estimates.

Do State Sales Taxes Crowd Out Local Option Sales Taxes?

Abstract Currently, sales taxes are imposed at both the state and local levels in 37 US states. In these environments, vertical tax competition occurs as governments share a common sales tax base, and local jurisdictions have autonomy over sales tax rates. As cash-strapped states look to sales taxes for additional revenues, local governments may worry about potentially adverse revenue impacts, as consumers react to combined tax rate increases. This study examines state-municipal and county-municipal fiscal spillovers using an empirical approach that accounts for endogenous tax policy leadership and voter tax fatigue. Employing comprehensive longitudinal data from Oklahoma, we find that state tax hikes significantly crowd out future rate increases for the large group of jurisdictions that are designated as followers. Leader jurisdictions are not found to display crowd-out tendencies, a result that is consistent with recent work suggesting that leaders may be less influenced by vertical fiscal externalities than other jurisdictions.

Impact of Market Concentration on Effective Sales Tax Rate: Evidence from Insurance Industry

This paper examines the impact of market concentration in the insurance industry on the effective insurance premium sales tax. I use unexpected disasters normalized by the population of the state as a source of exogenous variation in the market concentration. Unexpected disasters lead to the exit of insurance firms from the state leading to higher market concentration. I find empirical evidence that a ten percent increase in market concentration leads to five percent reduction in the effective insurance premium tax rate. This implies a reduction of $84 mn in tax revenues. I also show a correlation between market concentration and campaign contributions. This suggests that higher market concentration increases the likelihood of firms coming together as an interest group and lobby for a favorable (tax) policy.

Eliminating the Penny in Canada: An Economic Analysis of Penny-Rounding on Grocery Items

In theory, the nearest-nickel rounding scheme renders no financial gains for anyone given that each final digit has the same probability of appearing. However, in practice, rounding may yield non-zero net effects as most store prices end with nine. In this paper, price data from representative Canadian grocery stores are used to assess whether the current rounding system imposes a monetary loss on firms or consumers. Specifically, I evaluate how one- to ten-item purchases and the six different Canadian provincial sales tax rates influence penny-rounding. The results show that penny-rounding financially benefits the firms at the expense of the consumers, imposing a net transfer of approximately $3.27 million CAD from consumers to grocery vendors every year. This amount averages to $157 of additional revenue for a typical grocery store per year.

How to Improve Pennsylvania's Tax System

Pennsylvania ranks near the top in tax burden and near the bottom in business friendliness in the nation. While much good can be said about the state’s flat personal income tax rate and relatively low sales tax rate, Pennsylvania’s business taxes are in serious need of reform. The state government took a step in the right direction by phasing out its archaic capital stock and foreign franchise tax, but Pennsylvania’s economy is still being held back by its high corporate income and unemployment insurance taxes. Pennsylvania’s 9.99 percent corporate income tax rate, the second highest in the nation, puts the state at a significant competitive disadvantage while generating less than 7 percent of total tax revenue. A combination of business tax cuts and tax base broadening could make Pennsylvania’s economy grow faster without jeopardizing its public finances.

Entrepreneurship and State Taxation

Entrepreneurship plays a vital role in the economy, yet there exists little well-identified research into the effects of taxes on startup activity. Using recently developed county-level data on startups, we examine the effect of states' corporate, personal and sales tax rates on new firm activity and test for cross-border spillovers in response to these policies. We find that new firm employment is negatively—and disproportionately—affected by corporate tax rates. We find little evidence of an effect of personal and sales taxes on entrepreneurial outcomes. Our results are robust to changes in the tax base and other state-level policies.

Attention Variation and Welfare: Theory and Evidence from a Tax Salience Experiment

This article shows that accounting for variation in mistakes can be crucial for welfare analysis. Focusing on consumer under-reaction to not-fully-salient sales taxes, we show theoretically that the efficiency costs of taxation are amplified by differences in under-reaction across individuals and across tax rates. To empirically assess the importance of these issues, we implement an online shopping experiment in which 2,998 consumers purchase common household products, facing tax rates that vary in size and salience. We replicate prior findings that, on average, consumers under-react to non-salient sales taxes—consumers in our study react to existing sales taxes as if they were only 25% of their size. However, we find significant individual differences in this under-reaction, and accounting for this heterogeneity increases the efficiency cost of taxation estimates by at least 200%. Tripling existing sales tax rates nearly doubles consumers’ attention to taxes, and accounting for this endogeneity increases efficiency cost estimates by 336%. Our results provide new insights into the mechanisms and determinants of boundedly rational processing of not-fully-salient incentives, and our general approach provides a framework for robust behavioural welfare analysis.

Distributional and Environmental Effects of an Emissions-Differentiated Car Sales Tax

European countries introduced a combination of demand-side fiscal policies and mandatory supply-side emissions standards to reduce CO2 emissions rates of new cars. I quantify the equilibrium response to one of the most drastic demand-side policies, the Finnish CO2 differentiation of automobile sales tax rates. Despite having a drastic market impact, this environmental tax reform did not drive the observed decline of new-car CO2 emissions rates, given the concurrent introduction of mandatory EUCO2 emissions standards for manufacturers. The CO2 tax-rate differentiation however led to increased local pollution by promoting the sale of diesel-powered cars. The tax reform had a positive net welfare effect as it lowered tax rates on average. It was nonetheless also a regressive policy with large tax revenue losses and a disproportional benefit to high-income consumers. Optimal fiscal policy aiming to balance environmental and public finance goals needs to consider both the market structure as well as other concurrent policies on different levels of government.

Can State Tax Policy Increase Economic Activity and Reduce Inequality?

AbstractPrevious research shows that when changes in national commodity and income tax rates affect labor supply decisions differently, relative rates can be altered to increase welfare. In the U.S., 40 states impose both a sales and income tax; however, the reliance varies widely. This paper uses a computable general equilibrium model to examine tax policy changes in Colorado. The findings suggest that the revenue neutral changes to income and sales tax rates can affect both the level of economic activity and the distribution of income. When labor force participation is highly sensitive to income tax rate changes—which this paper suggests is the case—progressive changes to Colorado's tax policy changes can both reduce inequality and increase output and employment.