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Half of the jobs in the U.S. feature pay-for-performance. We study nonlinear income taxation in a model where such contracts arise in private labor markets that are constrained by moral hazard frictions. We derive novel formulas for the incidence of arbitrarily nonlinear reforms of any given tax code on both the mean of earnings and their sensitivity to performance. We show theoretically and quantitatively that, following an increase in tax progressivity, the higher performance-sensitivity caused by the crowding-out of insurance provided by firms is almost fully offset by a countervailing “performance-pay effect” driven by labor supply responses. As a result, earnings risk is hardly affected by policy. We then turn to the normative analysis of a government that levies taxes and transfers to redistribute income across workers with different levels of uninsurable productivity. We find that setting taxes without accounting for the endogeneity of private insurance is close to optimal. Thus, the common concern that standard models of taxation underestimate the cost of redistribution is, in the context of performance-based compensation, overblown.

I study the effects of a tax on ride-sharing trips in Chicago, which was nominally motivated by a desire to reduce congestion, but which also affected competition between ride-sharing platforms and traditional taxis. I find that platforms passed through more than 100% of the tax to consumers taking single rides, but there was incomplete pass-through to shared rides. This pattern can be explained by the two-sidedness of the market. The tax shifted demand back to taxis, but only in the downtown area, where competition is more intense. Finally, I find that the tax did not significantly reduce congestion and a simple calibration suggests that it lowered consumer surplus by over $300,000 per day.

This paper studies the implications of monopsony power for optimal income taxation and welfare. Firms observe workers' abilities while the government does not and monopsony power determines what share of the labor market surplus is translated into profits. Monopsony power increases the tax incidence that falls on firms. This makes labor income taxes less (more) effective in redistributing labor income (profits). The optimal tax schedule is less progressive. Monopsony power alleviates the equity-efficiency trade-off that occurs because the government does not observe ability, but at the expense of exacerbating capital income inequality. I illustrate these findings for the US economy.

Within a rich dynamic environment I derive a robust and testable condition for the optimality of capital income tax rates. I apply this condition to US data. Endogenous responses of factor prices mitigate welfare gains of capital tax increases for a large fraction of the population, who derives most of its disposable income from net wages. However, due to a positive revenue impact, the same price responses amplify the welfare gains of the very bottom of the income distribution, whose main income source are government transfers. As a consequence, general equilibrium forces may increase the optimal capital tax rate relative to its exogenous price counterpart, contradicting conventional wisdom.

We study the incidence of capital income taxation in a dynamic general equilibrium model with heterogeneous firms and lifecycle households. In this incomplete market setting, marginal excess burdens of three capital taxes, namely corporate income, dividend and capital gains taxes, are vastly different due to heterogeneous responses of firms and households, and heterogeneous effects of general equilibrium adjustments. Overall, taxing capital with a corporate income tax at the firm level results in higher excess burden than taxing capital with dividend and capital gains taxes at the household level. Given the salient features of the 2013 U.S. tax system, reforms that shift tax burden from the firm to household side potentially result in aggregate efficiency gains and overall welfare improving. However, the welfare benefits of these tax reforms are quite different across households and generations over transition, depending on skill type, age-cohort and government budget balancing rule. Thus, our findings highlight the importance of accounting for firm and household heterogeneity when analyzing the aggregate and distributional effects of capital income taxation.

We use Nielsen Homescan data to examine whether the incidence of excise taxes on menthol cigarettes varies with race. We find that taxes are shifted at significantly lower rates to Black smokers of menthol cigarettes than any other smokers. A potential explanation is that Black menthol smokers have lower search cost owing to targeted marketing and promotions. We find evidence that Black smokers receive significantly more price discounts for menthol products than white menthol smokers. Our results are robust across product types (packs and cartons), product qualities (generic and premium cigarettes), and cross-state tax avoidance. Our findings indicate that increasing cigarette taxes may be ineffective in reducing racial disparities in menthol cigarette use and smoking-related diseases, and that restricting the sale of menthol cigarettes may provide an alternative to cigarette taxation.

Stamp duty is a core part of the Australian tax system, but large components of its effect on the economy are unknown. In particular, the distribution of stamp duty's costs are not well understood. This has been hampered by a lack of quantitative studies of stamp duty's costs, and by limited discussion of stamp duty's effect on rental markets. This paper addresses this gap by establishing a theoretical framework for understanding stamp duty's incidence, and then by estimating the distribution of its costs. We find that stamp duty is a regressive tax, and that this regressiveness is predominantly due to the fact that housing costs are a significantly higher share of household income in low income households. We also find that the economic incidence of stamp duty is not particularly relevant to interrogations of how costs are distributed, because (unlike in many other markets), most people who sell housing tend to purchase houses of a similar value within a short time period of selling. We also provide some thoughts on current reform proposals and then discuss how land taxes could be designed in light of political barriers.

We analyze the welfare implications of property taxation. Using a sufficient statistics approach, we show that the tax incidence depends on how housing prices, labor and other types of incomes as well as public services respond to property tax changes. Empirically, we exploit the German institutional setting with 5,200 municipal tax reforms for identification. We find that higher taxes are fully passed on to rental prices after three years. The pass-through is lower when housing supply is inelastic. Combining reduced form estimates with our theoretical framework, we simulate the welfare effects of property taxes and show that they are regressive.

This paper studies commodity taxation in a model featuring heterogeneous consumers, imperfect competition, and tax salience. We derive new formulas for the incidence and marginal excess burden of commodity taxation, and we find that tax salience and market structure interact when considering tax incidence but do not directly interact when considering the marginal excess burden. We estimate the necessary inputs to the formulas by combining Nielsen Retail Scanner data from grocery stores in the US with detailed sales tax data. We calibrate our new formulas and conclude that the incidence of sales taxes on consumers is increasing in tax salience, and the marginal excess burden of taxation is larger than standard formulas that ignore imperfect competition and tax salience. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

As the nation is experiencing the need for ever-increasing government expenditures to address COVID-19 disruptions, rebuild the nation’s infrastructure, and many other worthy causes, conventional thinking calls for restoring at least a portion corporate taxes eliminated by the 2017 Tax Cuts and Jobs Act, especially from progressive circles. In this working paper, Edward Lane and L. Randall Wray examine who really pays the corporate income tax and argue that it does not serve the purposes most people believe. The authors provide an overview of the true purposes and incidence of corporate taxation and argue that it is inefficient and largely borne by consumers and employees, not shareholders. While the authors would prefer the elimination of the corporate profits tax, they understand the conventional thinking that taxes are necessary to help finance government expenditures—even if they disagree. Accordingly, the authors present alternatives to the corporate tax that shift the burden from consumers and employees to those who benefit the most from corporate success.

We develop a model to investigate the relations among (1) corporate tax incidence, (2) tax capitalization, and (3) implicit corporate tax in a competitive equilibrium. The economic pretax return is independent of whether the incidence of the corporate tax is shifted from shareholders to non-shareholders, such as customers or workers. However, tax incidence does affect the pretax accounting return, because the denominator of the return measure reflects the historical cost of the firms' assets and is often measured using prior year book values. To the extent a tax rate change changes the fair values of corporate assets (i.e., tax capitalization), the corporate tax affects pretax economic returns but not pretax accounting returns. The implicit tax rate for corporations reflects differences in corporate tax rates but is independent of pretax accounting returns.

Legislators often attach specific names to individual taxes to promote their purpose, increase transparency, and ease public backlash over tax increases. While having political benefits, does the simple act of naming and promoting a tax for a specific purpose have a more meaningful effect in the marketplace? Do consumers respond differently to tax-induced price increases depending on the name and purpose of the tax? In this article, a natural experiment is used to compare consumer responsiveness and tax incidence after the introduction of two new gasoline taxes in Alberta if: 1) an increase in the generic excise tax and 2) an environmentally-targeted "carbon levy". While similar in magnitude, the taxes were very different in name, purpose, and transparency. Results show that the naming and marketing of a tax can indeed matter if responses were lower and incidence higher for the carbon levy than the less transparent excise tax. Implications are discussed.

This paper exploits the introduction of a 75% tax on millionaire employees in France in 2013-2014 to better understand the incidence of top labour earners’ taxation. This tax on employers was implemented for two years only, and was announced as such. I estimate cross-sectional difference-in-differences at the percentile level, relying on matched employer-employee data and the complete panel of household income tax returns. I document that employers bore 55% of the tax initially, but that the removal of the tax in 2015 had an asymmetrical effect, largely benefiting employees through an increase in net wage. Turning to heterogeneity results, the incidence seems to depend on occupations. While football players were not affected by the tax, CEOs bore half of the cost of the tax, but they also demonstrated some avoidance behaviours. These findings support the intuition that employees’ bargaining power plays an important role in the impact of such a tax. Lastly, firms did not demonstrate a major change in their production behaviour at the introduction of the tax.

This paper conducts the first comprehensive review and meta-analysis for estimates of alcohol tax pass-through rates. The review examines data coverage by country; econometric models; and results for under- or overshifting by beverage. Several primary studies indicate substantial over-shifting of alcohol taxes. Median rates also suggest taxes are overshifted. Precision weighted-averages calculated for two samples show beer taxes are overshifted and wine-spirits taxes are fully shifted. Meta-regressions corrected for publication bias indicate, however, that full-shifting of alcohol taxes cannot be rejected for any beverage. Results are useful for alcohol tax policy and future research on tax incidence.

Debates about the taxation of business owners often center around the distributional impacts of these taxes and the degree to which they affect workers. The majority of business income in the U.S. is earned by pass-through businesses and taxed subject to the personal income tax system, yet the existence and magnitude of spillovers from personal income taxation to firm behavior has been difficult to estimate. This paper uses a new linked owner-firm-employee dataset created from administrative tax records to analyze how a recent increase in the top marginal tax rate faced by pass-through business owners affected the compensation of their employees. I use panel difference-in-differences methods to compare the earnings of employees in similar firms but whose owners were differentially exposed to a recent tax increase and estimate that approximately 15 to 18 cents per dollar of new tax liability was passed through to employee earnings. This resulted from lower earnings growth among employees attached to their firms, not compositional changes in employment. These results show behavioral responses to the business income taxation embedded in the personal income tax system and imply that the incidence of the personal income tax was not fully borne by those directly subject to the tax change.

In this paper, I review the empirical literature in the intersection of banks and corporate income taxation that emerged over the last two decades. To structure the included studies, I use a stakeholder approach and outline how corporate income taxation plays into the relation of banks and their four main stakeholders: bank regulators, customers, investors and tax authorities. I identify six dimension where taxes are important for banks: debt financing, tax incidence, organizational form choices, profit shifting, financial reporting transparency and customers’ tax avoidance. In addition, the studies in this review show that corporate income taxes lead to distortions between debt and equity financing, between on- and off-balance sheet financing, of prices and of investment allocations. My contribution to the literature is threefold: First, I contribute by providing, to the best of my knowledge, a first comprehensive review on this topic. Second, I deduce policy implications from the studies under review. Third, I point to areas of future research in the intersection of bank regulation and tax legislation.

Sales tax holidays are temporary suspensions of tax rates applicable to selected goods. In the United States, sales tax holidays are popular among states during “back-to-school” seasons for educational supplies and new clothing. One motivation for these policies is to provide state assistance to households with children for necessary goods. This paper investigates the distributional impact across income groups on school supplies’ and apparel purchases during these holidays for a panel of nearly 170,000 households from 2004 to 2016. Judging by conventional household income elasticities the tax savings are very progressively distributed. However, we demonstrate tax holidays to be poorly targeted if judged by the intention of arranging transfers to low income households or households with children. For instance, an equivalent cash transfer to households with children and less than $20,000 in income would have a revenue cost of five percent of what is waived by the sales tax holidays.

This paper estimates the effect of sugar-sweetened beverage (SSB) taxes on sugary drink consumption and prices in Berkeley, CA. SSB taxes have gained popularity with policymakers to fight obesity, yet their effects on market outcomes, especially consumption, are still unclear. I use detailed grocery scanner data from treated city Berkeley, CA and control city Boulder, CO between January 1, 2014 and December 31, 2015. My paper uses a triple-differences estimation that interacts manufacturers and treated products to uncover the differential effects that major brand and private label manufacturers might have on prices which in turn affects consumption of their products. Results show that failing to include manufacturers understates the price effect and averages out important consumption substitution patterns. Pepsi and Dr. Pepper pass through over 50% of the tax, Coke passes through 23% of the tax, and private label sugary drink prices do not change. Similarly, including the differential consumption effect by manufacturer shows that small decreases in sales of major brands are offset by an increase in sales of private label products. I discuss potential mechanisms behind these results.

I employ a unique data-set on fueling station locations in the United States and their corresponding retail gasoline prices to estimate how state tax discontinuities affect business location decisions and tax incidence. The analysis shows that the expected number of fueling stations on the low-tax side of a state border is between 20 and 30 percent higher than on the high-tax side. Gasoline consumers bear 75 percent of the fuel tax on the high-tax side, as compared to 100 percent on the low-tax side. The effect of the border on station location and tax incidence disappears with 15 miles of distance. These results provide some of the first estimates of the effect of tax discontinuities at borders on the location choices of retailers, their competitors, and consequences for the pass-through of taxes to prices.

Against the backdrop of corporate tax policy changes in India, the paper attempts to measure the incidence of corporate income tax in India under a general equilibrium setting. Using seemingly unrelated regression coefficients and dynamic panel estimates, we tried to analyze both the relative burden of corporate tax borne by capital and labor and the efficiency effects of corporate income tax. The data for the study is compiled from corporate firms listed on the Bombay Stock Exchange (BSE) and the National Stock Exchange of India (NSE) for the period 2000–15. Our empirical estimates suggest that in India capital bears more of the burden of corporate taxes than labor. However, the results vary with different proxies of capital used in the models. Though it is contrary to the Harberger (1962) hypothesis that the burden of corporate tax is shifted to labor rather than capital, it confirms the existing empirical results in the context of India.

The paper attempts to measure the incidence of corporate income tax in India under a general equilibrium setting. Using seemingly uncorrelated regression coefficients and dynamic panel estimates, we tried to analyze both the relative burden of corporate tax borne by capital and labor and the efficiency effects of corporate income tax. The data for the study is compiled from corporate firms listed on the Bombay Stock Exchange (BSE) and the National Stock Exchange of India (NSE) for the period 2000-15. Our empirical estimates suggest that in India capital bears more of the burden of corporate taxes than labor. Though it is contrary to the Harberger (1962) hypothesis that the burden of corporate tax is shifted to labor rather than capital, it confirms the existing empirical results in the context of India.

In 2012 the state of Washington created a legal framework for production and retail sales of marijuana. Ten other U.S. states and Canada have followed. These states hope to generate tax revenue for their state budgets while limiting harms associated with marijuana sales and consumption. We use a unique administrative dataset containing all transactions in the history of the industry in Washington to evaluate the effectiveness of different tax and regulatory policies under consideration by policymakers and study the role of imperfect competition in determining these results. We use both a reduced form sufficient statistic approach and structural methods to show a number of results. First, Washington's strict cap on firm entry has resulted in retailers with substantial market power. This market power has immediate consequences for both state tax revenue and consumer welfare. Second, because these entry restrictions have caused retailers to behave like local monopolists, the state could substantially increase revenue generated from marijuana legalization by acting as the retailer itself, as it did for alcohol sales until 2012, without a large increase in prices. Third, despite having the nation's highest tax rate at 37%, marijuana in Washington is not overtaxed as many policymakers in other states have argued. The high taxes do not result in lower revenue or a substantial black market. Instead Washington is still on the upward sloping portion of the Laffer curve and the amount of revenue generated by a tax increase is significantly larger due to retailer market power than it would be under perfect competition. Our results suggest there is not widely available black market marijuana competing with legal retail sales. Finally, the high excise tax is primarily borne by consumers and not by firms, and there is a large social cost associated with each dollar raised.

The standard partial equilibrium formula for pass-through substantially mismeasures incidence in the presence of demand or supply interdependencies. We study general equilibrium tax incidence in a perfectly competitive, multiproduct setting. If only one product is taxed, the general equilibrium incidence will always be greater on the consumer than suggested by the standard incidence formula. If the tax changes on multiple related commodities, while maintaining perfect competition, a necessary condition for overshifting is that the related commodities are substitutes. Pass-through greater than one-hundred percent is not sufficient to infer market structure. When empirically estimating pass-through, pass-through estimates capture the direct effect of the tax on the market, the indirect feedback effects resulting from price and tax changes in other markets and taxation of inputs to production. Empirically applying our theory to estimate pass-through in alcohol markets, we show that demand interdependencies and simultaneous tax changes on related products are important.

This study considers the ways in which government, whether through spending programs or regulations, has made it more difficult for people to find their way out of poverty. It argues that when considering new regulations or eliminating existing ones, policymakers should pay more attention to the regressive effects of government, from the way in which it prevents upward mobility to the way in which some policies and programs burden the poor more than other groups. Specifically, it explores the regressive effects of occupational licensure, zoning laws, and other restrictions on operating businesses, as well as the effects of sin taxes. The discussion of occupational licensure includes a small case study of Uber, the ride-sharing platform. If government policy is restricting upward mobility, then policymakers should look more seriously at ways to stop government from harming those seeking to escape poverty.

This paper seeks to produce evidence on the labor incidence of the taxation of machinery and equipment purchases by manufacturers under the state general sales tax. Using quarterly data on manufacturing labor from the Quarterly Census of Employment and Wages between 2001 and 2012, we exploit tax policy discontinuities among adjacent counties along state borders. The results demonstrate that on average there are no significant losses or gains to manufacturing labor, but the effects are heterogeneous across manufacturing subsectors.

Policymakers frequently employ tax holidays to stimulate spending and transfer state revenues to favored groups. Perhaps the most common form of this policy in the United States are “Back to School” tax holidays where states waive the retail sales tax on selected school supplies in the fall. Surprisingly, the empirical research of this policy has found that tax savings are overshifted to households. This paper argues that tax holiday dates should be assumed to be selected endogenously so as to minimize forgone revenue and maximize consumer incidence by targeting periods where prices are lowest. Causal evidence is considered in a natural experiment out of Tennessee, where legislation for a spring sales tax holiday in 2006 and 2007 for school supplies was reauthorized as part of a broader series of tax cuts. We conclude from the evidence of these Tennessee events suggest that households, on average, receive the full tax savings during these programs. However, consumer incidence is heterogeneous with some retailers recapturing the tax savings with higher pre-tax prices.

Many state and local governments exclude some medical products from the sales tax base, including some that are primarily used by men such as hair growth products. However, tampons and other menstrual hygiene products are subject to sales taxes in most states. A recent social movement advocates for the repeal of these “tampon taxes” and several class action lawsuits have been filed against states citing equal protection violations. In this article, we use the 2005 elimination of menstrual hygiene products from the sales tax base in New Jersey as a natural experiment to study who benefits from the repeal of tampon taxes. We find that the tax break is fully shifted to consumers, but that the tax break is not distributed equally. Low‐income consumers enjoy a benefit from the repeal of the tax by more than the size of the repealed tax. For high‐income consumers, the tax break is shared equally with producers. The results suggest that repealing tampon taxes removes an unequal tax burden and could make menstrual hygiene products more accessible for low‐income consumers.

This paper estimates an Inequality Deflator for the Australian economy, which represents the distributional trade-offs that exist within the current tax and transfer system. These trade-offs can be used to evaluate policy alternatives where equity is an important consideration, as well as provide a normative evaluation of the trend towards increased inequality in Australia. This normative evaluation can be justified in two ways. First, in can be argued that the government has revealed a preference for distributional trade-offs through the tax system, which should be followed in other policy analysis. Second, this approach is equivalent to altering the standard Kaldor-Hicks welfare criterion such that compensating payments are made through the existing tax system (rather than as lump sum payments). As such, implementing policy in this way, along with adjustments to the tax and transfer system, can be thought of as identifying realisable pareto improvements. In order to estimate an Inequality Deflator in the Australian setting, this paper develops an estimation method using The Melbourne Institute Tax and Transfer Simulator (MITTS). This methodology also allows for an Inequality Deflator to be estimated at the household level, and for different family types. Finally, the Inequality Deflator is applied to the Australian economy over the period 1994-2013 and finds that if the tax system was used to spread growth equally across the population, growth would be around 18 percent lower than recorded.

Many studies show that workers make poor decisions about pension savings. Policy responses to these failures include social security retirement arrangements, tax benefits for pension savings and, in some countries, also mandatory private savings towards retirement. This study examines the response of Israeli employees to the introduction of mandatory pension contributions, and the medium-term labor market effects of the arrangement, using a randomly selected panel of 300,000 employees. The first year of the arrangement, when enforcement was lax and compliance partial, provides an opportunity to identify employee preferences, before compliance became almost universal. We find that in this year both the probability of beginning to save and the tendency to contribute at rates above the required minimum were positively correlated with how (un)beneficial the required pension savings were for the employee. We also show that 5 years after the arrangement was initiated wages of its target population were reduced by nearly the full amount of the increase in employers' contributions. These outcomes indicate a rational and informed response of the employees and that such arrangements require careful and detailed examination of their consequences for the affected population.

We study the effects of the taxation of digital platforms on the online advertising market. We exploit novel data on daily unit prices of Facebook ads targeted to country-specific audiences, collected around a major change in the firm’s accounting practices following the introduction of the UK Diverted Profit Tax. We show that a substantial increase in ads prices followed such change, although with heterogeneous intensity across countries. These results are in line with a model of a platform operating in the global advertising market. We show that taxation of profits generated in one country makes the price charged to advertisers from that country (resp. other countries) increase (decrease). Accordingly, we demonstrate that aggregate advertising prices in OECD countries increased more, after the policy change, the larger is the market share of UK-based advertisers.

Do commercial property owners internalize increases in tax payments or pass these increases onto the renters of commercial space? To address this question, I develop a nonlinear mixed effect multilevel model that exploits cross-sectional and longitudinal variation in a panel of office rent and tax rate data for 1,300 office buildings across 93 Eastern Massachusetts municipalities over a 27 year period. Findings for the full set of buildings indicate a full-pass-through of a dollar increase in the tax payment to the renter of space. However, incidence for less centrally located buildings (outside a 5km radius from the Boston central business district) ranges from $0.52 to $0.67 for a dollar increase in the tax payment; incidence for more central buildings (within 5km from the Boston central business district) ranges from $1.06 to $1.39. An incidence greater than one is in line with theoretical hypotheses regarding general tax incidence within imperfectly competitive markets. Further, these findings indicate that elasticity of demand for office space relative to elasticity of supply may be larger in more decentralized locations.

Economists broadly agree that the economic burden of corporate taxes is not entirely borne by shareholders, but also borne in part by employees or consumers. We model corporate tax avoidance in a setting where shareholders do not bear the entire economic burden of the corporate tax. We show the relation between corporate tax incidence and corporate tax avoidance depends on the elasticity of labor supply, the productivity of capital relative to labor, and the tax deductibility of labor and capital. These forces have competing effects, making the association between tax avoidance and incidence an empirical question. Empirically, we find that firms whose shareholders bear less of the economic burden of corporate taxes engage in less avoidance, and that the results are strongest under conditions predicted by our model. Our findings suggest that maximizing after-tax profits might entail less tax avoidance if shareholders do not entirely bear the corporate tax burden.

We show that an insight from taxation theory allows identification of both the supply and demand elasticities with only one instrument. Ramsey (1928) and subsequent models of taxation assume that a tax levied on the demand side only affects demand through the price after taxation. Econometrically, we show that this assumption functions as an additional exclusion restriction. Under the Ramsey Exclusion Restriction (RER) a tax reform can serve to simultaneously identify elasticities of supply and demand. We develop a TSLS estimator for both elasticities, a test to assess instrument strength and a test for the RER. Our result extends to a supply-demand system with J goods, and a setting with supply-side or non-linear taxes. Further, we show that key results in the sufficient statistics literature rely on the RER. One example is Harberger’s formula for the excess burden of a tax. We apply our method to the Norwegian labor market.

We estimate economic incidence of social security contributions (SSC) on the basis of cross-sectional earnings distributions. The approach exploits discontinuities in earnings distributions at kinks in the budget set which are informative about tax incidence. Contrary to most research on SSC incidence, it does not rely on policy reforms, panel data, or hours information. When the location of kinks does not change significantly, estimates represent equilibrium incidence and are less affected by short-run adjustment frictions than results based on policy reforms. We refine the framework proposed by Alvaredo and Saez (2007), discuss identifying assumptions and related problems in empirical applications. We also suggest parametric and non- parametric estimators. The approach is applied to earnings caps of SSC in Germany where the marginal SSC rate drops to zero. The linked employer-employee data used provide precise measures of gross and net earnings. Utilizing two separate earnings distributions improves identification in the presence of measurement error. We find substantial negative discontinuities at most earnings caps of SSC in the distribution of observed net earnings. Together with smooth gross earnings distributions around the caps this provides consistent empirical evidence that legal and economic incidence of SSC coincide.

We study the incidence and the optimal design of nonlinear income taxes in a Mirrleesian economy with a continuum of endogenous wages. We characterize analytically the incidence of any tax reform by showing that one can mathematically formalize this problem as an integral equation. For a CES production function, we show theoretically and numerically that the general equilibrium forces raise the revenue gains from increasing the progressivity of the U.S. tax schedule. This result is reinforced in the case of a Translog technology where closer skill types are stronger substitutes. We then characterize the optimum tax schedule, and derive a simple closed-form expression for the top tax rate. The U-shape of optimal marginal tax rates is more pronounced than in partial equilibrium. The joint analysis of tax incidence and optimal taxation reveals that the economic insights obtained for the optimum may be reversed when considering reforms of a suboptimal tax code.

This paper uses store-level data on consumer liquor revenues and volume sales in Oregon to estimate the effect of state tax differentials on consumer demand. Liquor privatization in Washington led to higher prices from new taxes. I calculate the impact of tax incidence on tax avoidance using variation in store proximity to the Washington-Oregon (WA-OR) border. By calculating driving distances between Oregon liquor stores and border crossings, I find that stores closest to the WA-OR border experienced an additional 20 percent increase in revenues (1,665 additional liters) relative to interior stores, and that avoidance behavior dissipates monotonically from the Washington-Oregon state line.

To help first- or second-year graduate students in economics apply their theoretical training, this paper shows how to solve a simple and intuitive computable general equilibrium (CGE) model using ...

I investigate the supply side incidence of commodity taxes. My empirical analysis employs a unique panel dataset of nearly 35,000 retail establishments that directly captures pricing behavior (markup) and profits generated from cigarette sales. Higher cigarette taxes drive down profits of convenience stores but not of grocery, drug, and liquor stores. Because a higher proportion of convenience stores are small businesses, my findings suggest that cigarette taxes are regressive on the supply side of the retail market.

This paper investigates the shifting of sales taxes to consumers through retail prices. Retail data on gasoline prices are used at the station level within the U.S., including observations from all fifty states and the District of Columbia. A difference-in-difference approach is employed to identify the effects of the changes in state taxes as of January 1st, 2015, when five states have increased their gasoline sales taxes, while five other states have decreased theirs. States experiencing such changes in sales taxes (between December 31st, 2014 and January 1st, 2015) are analyzed as the treatment group of a natural policy experiment, where the control group consists of states with no changes in their sales taxes. The results show that increased sales taxes are shifted forward to consumers, while reduced sales taxes are shifted backward. The pass-through measures differ significantly across states, showing the importance of having a nationwide analysis. When we search for a systematical explanation for the heterogeneity of tax shifting across retailers, it is shown through a threshold analysis that the initial retail price is an important determinant: while pass-through of an increase in sales taxes goes down with initial prices, pass-through of a reduction in sales taxes goes up with initial prices, showing evidence for an asymmetric incidence of sales taxes interacting with initial retail prices. The results are robust to the consideration of retailer characteristics, wholesale prices, retail brand effects and hourly price changes within each day.

Tax incidence and tax competition have largely been studied separately. Models assessing the incidence of excise taxes do not consider strategic interaction and exclusively assess the pass-through of taxes to prices. These settings focus on imperfectly competitive markets where prices can react more (less) than proportionally to a variation in tax rates. On the other hand, tax competition models focus on the strategic interactions arising because of a shared tax base but assume producer prices to be constant. Hence, the pass-through of taxes is restricted to be fully on consumers. This paper extends Keen (1997) by relaxing this assumption and, thus, by allowing local governments to internalize the possibility that taxes are over-shifted (undershifted). Interestingly, market structure (that was absent in previous settings), turns out to be one of the determinants of the vertical reaction function in this model; particularly determining the sensitivity of local tax setters to a variation of higher-tier taxes.

Studying very detailed micro data collected around two different VAT reforms in Europe, we show that tax incidence is heavily dependent on the characteristics of the price-setting firms. The reforms generated bimodal price-change distributions; nearly all independent restaurants left prices unchanged whereas a substantial fraction of restaurants belonging to chains chose a complete pass-through. These differences cannot be explained by location, initial prices or other market-segment indicators. Instead, differences appear to arise because independent restaurants aim for (very) crude price ranges rather than fine-tuned optimized prices, whereas chains use more elaborate, coordinated pricing strategies.

We contribute to the empirical literature on the effective incidence of corporate income taxation by using the German Business Tax Reform of the year 2000 (GBTR 2000) as a natural experiment. Its effect on wages in the manufacturing sector is identified by means of a difference-in-differences analysis that uses French firms as comparison group. We provide evidence that GBTR 2000 led to a significant and sizeable wage effect. For 2001, the first year after GBTR 2000 took effect, we estimate a short-run effect that implies a wage increase of 7.9 percent. Due to the dynamic nature of the empirical model used, the incidence effect grows gradually over time during the evaluation period.

Controversy over public health policies targeting carbonated soft drinks has catalyzed cross-disciplinary debate. Though beverage demand is characterized by purchases from multiple categories per trip, existing research using soda data predominantly employs discrete choice models, which restrict consumers to single unit choices. This paper instead combines a multiple-choice utility function with a hierarchical Bayesian model to estimate household-level preferences across beverages. I find that households in less healthy counties (as measured by mean body mass index) consume more regular soda per capita, have stronger preferences, and are less price sensitive than households in more healthy counties, suggesting that soda tax proposals should be county-specific. Because market players possess varying degrees of market power, I also study soda tax incidence. Simulations of equilibrium prices in various tax scenarios demonstrate that the assumption of 100% pass-through to prices, ubiquitous in soda tax research, underestimates the true change in prices, further underscoring the need for a county-level approach. Calculations then reveal that most of a counterfactual tax-induced shift in consumption is due to an income effect and low cross-price elasticities, so that while city governments are unlikely to raise enough revenue to cover the healthcare costs related to soda consumption, the downstream health benefits induced by a soda tax compensate most households for the reduction in utility.

This paper disproves both the theory by Grossman and Helpman. When they have merely reproduced the tax incidence theory, their complicated methods are unnecessary. When a higher optimal tax rate means lower revenue, such theory is not optimizing. A ridiculous tax rate for the suppliers destroys their theory completely. When their original objective is reinstated, this paper proves that the optimal tax or tariff rate must be zero. Grossman and Helpman have nothing to sell.

In this paper, we revisit the question of the banks’ ability to shift corporate income taxes to customers by increasing their net interest margins. We estimate tax incidence for 1,411 European commercial banks over the period 1992-2008. Unlike earlier studies which suffer from endogeneity problems or misspecification of the tax burden, we do not find any significant relationship between implicit taxes and interest margins. Our result is in line with the theory because income tax does not affect the profit maximization function and, consequently, should not be passed on.

This is the first analysis of the incidence of a bank tax that is imposed on banks’ balance sheets. Within the framework of an oligopolistic version of the Monti-Klein model, the pass-through of a bank tax levied on loans is stronger when elasticity of credit demand is low. To test this hypothesis, we investigate the incidence of the Hungarian bank tax that was introduced in 2010 on banks’ assets. This case is well suited for our analysis because the tax rate is much higher for large banks than for small banks, which allows relying on difference-in-difference methodology to disentangle the impact of the tax from any other shock that might have occurred simultaneously. In line with model predictions, our estimations show that the tax is shifted to customers with the smallest demand elasticity, such as households. In terms of economic policy implications, our results suggest that enhanced borrower mobility could reduce the ability of banks to shift taxes to customers.

Consumption tax rates targeted at specific sectors are often reformed without empirical knowledge about the efficiency of these policies. This paper sheds light on the efficiency issue, the potential for welfare improving reform, by studying the incidence of value added taxes (VAT) on prices and quantities of barber services traded. I also study the incidence on the profits made by the targeted firms. I utilize a VAT reform targeted at a specific service sector which creates a natural experiment set up. VAT for hairdressing services in Finland was reduced from 22% to 8%, whereas the normal tax treatment still applied to beauty salons and other labor intensive services. The choice of the treatment and control groups was exogenous to circumstances in Finland, since these groups were selected in a more wider European setting. The results suggest that hairdressers cut their prices only by half of what complete pass-through would have implied, and that there was hardly any adjustment in the equilibrium quantity due to the reform. Instead of lowering prices, most hairdressers were able to increase their profits. There is important heterogeneity in the results according to firm size.

This paper provides causally plausible estimates of the effects of consumption taxes in a service sector on prices and demand for restaurant services. We utilize a large VAT reform affecting restaurant meals, where the VAT rate was cut from 22% to 13% in 2010 in Finland. By comparing with restaurants in neighboring countries and other related sectors in Finland, the reform offers a natural experimental approach. The results indicate that restaurants reduced their prices on average by only 2%, which equals roughly a quarter of the full pass-through. Remarkably, at the same time a majority of restaurants did not reduce their prices at all and a non-trivial fraction of restaurants reduced their prices by exactly the full pass-through. Larger restaurants reduced their prices more often than smaller restaurants. We do not observe any increases in the quantity of services sold or in wage sums paid to employees. Furthermore, there are no changes in mediumterm entry and exit due to the reform.

This study of governance is at the nexus of the public and private sector. New business models combined with poor local governance is negatively impacting social and environmental outcomes in economies dependent on mass tourism. Using longitudinal data of Cancun, social indicators combined with the public finances demonstrate that until 1995 Cancun’s contribution is positive in terms of employment creation, living standards, foreign currency generation and tax revenue. Since 1995 the change of tourism models to All-Inclusive hotels and cruise ships, and the mounting hubris of sub-national authorities have conspired to reduce tax effort and employment security while increasing uninsured workers and income disparity. Quintana Roo state and Cancun are average at best in terms of social outcomes despite investment in social programs far exceeding sub-national tax capture. Through a variety of mechanisms, All-Inclusives prey on local institutional weaknesses and ineffective governance much of which is engendered by the myth of tourism wealth. For more than a decade, Mexico´s federal government subsidized these tourist zones and international tourists. Moreover, Mexico is no exception because Cancun’s dynamics are those of mass tourism itself.

Land transfer taxes are a substantial portion of the cost of moving house in many developed countries. Because stamp duties are endogenous with respect to the house price, we create an instrumental variable that is the stamp duty on a property, based on the starting house price in the relevant postcode and the national house price trend. In a specification with postcode and year fixed effects, this instrument effectively captures policy changes and non-linearities in the stamp duty schedule. We find that the impact of an increase in the tax rate is to lower house prices suggesting that the economic incidence of the tax falls on the seller. We also observe impacts of stamp duty on housing turnover. A 10 per cent increase in stamp duty lowers turnover by 3 per cent in the first year, and by 6 per cent if sustained over a 3-year period.