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The Political Economy of Sales Taxes and Sales Tax Exemptions

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  • Andreea Militaru
  • Thomas Stratmann

Abstract

We analyze the choice politicians face when seeking votes from groups that lobby for sales tax rate decreases or from groups that lobby for certain tax exemptions, given the constraint that politician wants to raise a certain amount of revenue. Using the application of sales taxes and sales tax exemptions we develop a model predicting a positive relationship between the number of sales tax exemptions and the sales tax rate. We find support for the hypothesis that there is an equilibrium relationship between tax rates and exemptions. We find that a one-unit increase in the number of exemptions is associated with an increase between 0.10 and 0.25 percent increase in the sales tax rate.

Suggested Citation

  • Andreea Militaru & Thomas Stratmann, 2014. "The Political Economy of Sales Taxes and Sales Tax Exemptions," CESifo Working Paper Series 5016, CESifo.
    • Handle: RePEc:ces:ceswps:_5016
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    References listed on IDEAS

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    1. Besley, Timothy J. & Rosen, Harvey S., 1999. "Sales Taxes and Prices: An Empirical Analysis," National Tax Journal, National Tax Association;National Tax Journal, vol. 52(2), pages 157-178, June.
    2. Donald Bruce & William F. Fox & M.H. Tuttle, 2006. "Tax Base Elasticities: A Multi-State Analysis of Long-Run and Short-Run Dynamics," Southern Economic Journal, John Wiley & Sons, vol. 73(2), pages 315-341, October.
    3. George J. Stigler, 1971. "The Theory of Economic Regulation," Bell Journal of Economics, The RAND Corporation, vol. 2(1), pages 3-21, Spring.
    4. Hawkins, Richard R., 2002. "Popular Substitution Effects: Excess Burden Estimates for General Sales Taxes," National Tax Journal, National Tax Association;National Tax Journal, vol. 55(4), pages 755-770, December.
    5. Keith R. Ihlanfeldt, 1995. "Ten Principles for State Tax Incentives," Economic Development Quarterly, , vol. 9(4), pages 339-355, November.
    6. Chouinard Hayley H & Davis David E & LaFrance Jeffrey T & Perloff Jeffrey M, 2007. "Fat Taxes: Big Money for Small Change," Forum for Health Economics & Policy, De Gruyter, vol. 10(2), pages 1-30, June.
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    Cited by:

    1. Faiz Ur Rehman & Muhammad Nasir, 2018. "In the Same Boat, but not Equals: The Heterogeneous Effects of Indirect Taxation on Child Health in Punjab-Pakistan," PIDE-Working Papers 2018:158, Pakistan Institute of Development Economics.
    2. Rehman Faiz Ur & Nasir Muhammad, 2020. "In the Same Boat, but not Equals: The Heterogeneous Effects of Indirect Taxation on Child Health in Punjab-Pakistan," Asian Journal of Law and Economics, De Gruyter, vol. 11(3), pages 1-26, December.

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    More about this item

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior

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