Public Finance in the Era of the COVID-19 Crisis
18-20 August 2021 | Online, Organized by University of Iceland, Reykjavík
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Please note that all times are shown in the time zone of the conference. The current conference time is: 5th Dec 2021, 06:06:30pm GMT
E05: Taxing Consumption and Sins
12:30pm - 12:52pm
Taxing the Sweet Tooth - Evidence on the Role of Substitution in Excess Burden
1VATT Institute for Economic Research, Finland; 2Labour Institute for Economic Research, Finland; 3Newcastle University, UK
We lack definitive answers when excise taxes or VAT meet their goals. To provide novel answers to this question we study a sweets and soda tax scheme in Finland providing us quasi-experimental variation in excise taxes. The reforms we study create variation also in how close substitutes the closest non-taxed goods are to the taxed goods allowing us to examine the role of substitution as a mechanism explaining the main results. We utilize credible control groups not affected by the reforms and have access to unique product- and week-level data on sales containing hundreds of millions of observations. Intriguingly, we find that without very close non-taxed substitutes the sweets tax did not create any discernible demand responses, but do create large responses when very close non-taxed substitutes are available. We discuss the role of substitution further with data on substitutability between products and in theoretical consumption taxation models.
12:52pm - 1:15pm
The Effect of Sin Taxes - The Case of Sugar Taxes in Norway
University of Oslo, Norway
This paper examines the effects of a large 2018 increase in sugar taxes on prices and consumption in Norway. I use a novel data set of all individual itemized receipts, covering 99.9 percent of the Norwegian grocery market. It allows me to study effects and substitution patterns of sin taxes at greater detail than previous literature, overcoming its measurement and aggregation problems. Using an event study design with a control group, I limit the likelihood that unobserved incidents bias my estimates. Preliminary analyses show the puzzling result that, while there is a positive effect of the taxes on prices, a significant demand response is lacking. I will study two potential mechanisms that can explain this puzzle: limited demand leakage and intra-category substitution. I will formalize the latter mechanism in a theoretical model. The mechanisms have clear policy implications for the level and design of taxes.
1:15pm - 1:37pm
Commodity Tax Pass-through With Incomplete Information
LMU Munich, Germany
We investigate how the pass-through rate of commodity taxes depends on competition in a setting where consumers have imperfect information about prices. We use a theoretical search model that has two key predictions: First, the larger the number of price sensitive consumers, the higher the pass-through rate. Second, there is a hump-shaped relationship between the average pass-through experienced by consumers and the number of sellers. We test our theoretical predictions by studying pass-through in the context of a tax decrease and increase in the German retail fuel market. We estimate pass-through of these tax changes to diesel and gasoline prices using a unique dataset containing the universe of price changes at fuel stations in Germany and France and a synthetic difference-in-differences strategy. Our empirical results are in line with our theoretical predictions. Finally, we show that our theoretical framework can encompass and reconcile a large number of empirical observations in previous studies.
1:37pm - 2:00pm
Anticipation and Consumption
1Brown University; 2Boston University
This paper introduces a model of how the timing of information affects consumption decisions and tests its predictions in both developed and developing contexts. In our model, consumers form intertemporal plans and experience utility from anticipating future consumption. The model predicts excess sensitivity of spending to receiving a windfall, with smaller spending responses when there is more time to anticipate receiving the payment. The prediction that waiting leads to more patient decisions does not depend on whether consumers are liquidity constrained. Using Nielsen Consumer Panel data, we find higher marginal propensities to spend for households scheduled to receive the 2008 Economic Stimulus Payments sooner. Using data from randomized experiments in Kenya and Malawi, we find higher savings and assets among households scheduled to wait longer before receiving lump-sum unconditional cash transfers. Finally, we discuss existing evidence on how consumption responds to gains, losses, and news in light of our model.
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