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

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  • Sunjoo Kwak

    (Hankuk University of Foreign Studies)

  • Jongmin Shon

    (Soongsil University)

Abstract

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.

Suggested Citation

  • Sunjoo Kwak & Jongmin Shon, 2022. "Tax Salience and Cyclical Asymmetry in Tax Rate Adjustments: Testing the Indirect Tax Hypothesis," Hacienda Pública Española / Review of Public Economics, IEF, vol. 240(1), pages 3-29, March.
    • Handle: RePEc:hpe:journl:y:2022:v:240:i:1:p:3-29
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    More about this item

    Keywords

    Tax salience; Tax rate adjustments; Cyclical asymmetry; State tax policy; Political economy.;
    All these keywords.

    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • P16 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Capitalist Institutions; Welfare State

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