THE HOUSEHOLD EXPENDITURE RESPONSE TO PRE-ANNOUNCED CONSUMPTION TAX ...

173 Pages·2013·3.92 MB·Vietnamese

THE HOUSEHOLD EXPENDITURE RESPONSE TO
PRE-ANNOUNCED CONSUMPTION TAX CHANGES

by

David Byron Cashin

A dissertation submitted in partial fulfillment
of the requirements for the degree of
Doctor of Philosophy
(Economics)
in The University of Michigan
2013

Doctoral Committee:

Professor Joel B. Slemrod, Chair
Professor Robert J. Franzese Jr.
Professor James R. Hines Jr.
Associate Professor Christopher L. House
DEDICATION
This dissertation is dedicated to James, Mary, and Daniel Cashin for their unwavering
support and frequent canine care throughout my career as a graduate student.

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ACKNOWLEDGEMENTS
The successful completion of my dissertation would not have been possible without the
assistance and guidance of many. However, several individuals and organizations have played a
crucial role in the completion of this dissertation over the past five years, and for that they
deserve my explicit thanks.
I would first like to thank the Chair of my dissertation committee, Joel Slemrod, for his
support and guidance throughout this process. My dissertation research agenda began with a
research proposal in his Public Finance field course in the Fall 2008 semester, and he has been
incredibly supportive ever since.
I would also like to thank Mel Stephens, who put me in contact with Takashi Unayama, a
professor of economics in Japan and my Chapter I co-author. Without Takashi’s access to the
Japanese Family Income and Expenditure Survey and his eagerness to collaborate, Chapters I
and II of this dissertation would not have been possible. I look forward to continuing our
collaboration in the future.
In addition, I am grateful to the National Science Foundation for awarding me a
fellowship as part of its East Asia and Pacific Summer Institute program in 2010. The fellowship
provided me with funds to spend the Summer of 2010 in Japan completing work with Takashi on
Chapter I of this dissertation.
Completion of Chapter III of this dissertation was made possible with generous funding
from Peter Merrill of PriceWaterhouseCoopers and the International Tax Policy Forum. The
funding allowed me to travel to New Zealand in 2011 to replicate the research I carried out in
Japan. I am also grateful to David White of Victoria University of Wellington for hosting me
during my stay, and to the Benge family for their hospitality while I resided in New Zealand.
I was also lucky to have a dissertation committee composed of members who were
supportive of my work and complemented one another well. Joel’s edits to my drafts were
invaluable. I am also grateful that he encouraged me to incorporate a structural model of
household consumption into my work. I believe that the quality of my dissertation research is
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much stronger as a result. Jim Hines’ economic intuition is top notch, and I benefitted greatly
from discussions with him, particularly those focused on the accelerated purchase of durables
and storables prior to a consumption tax increase, and how to calculate the marginal excess
burden of pre-announced consumption tax changes. I am grateful to Chris House for his
guidance on structural modeling, and I have also benefitted from his feedback on presentation
style.
Several of my classmates have provided useful feedback over the years as well. In
particular, I would like to thank Daniel Murphy, Pawel Krolikowski, Andrew McCallum,
Caroline Weber, and Nathan Seegert.
Any errors found below are my own.

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TABLE OF CONTENTS

DEDICATION ii
ACKNOWLEDGEMENTS iii
LIST OF TABLES vii
LIST OF FIGURES ix
LIST OF APPENDICES xii
ABSTRACT xiii

CHAPTER
I. Measuring Intertemporal Substitution in Consumption: Evidence from a VAT 1
Increase in Japan
Abstract 1
Introduction 1
The Consumption Tax Increase: An Ideal Natural Experiment to Estimate the IES 3
A Consumption Tax Rate Increase and the Intertemporal Elasticity of Substitution 7
Empirical Evidence 14
Summary and Discussion 18
References 31
II. Characterizing Intertemporal Substitution via Pre-Announced Consumption Tax 33
Increase
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Abstract 33
Introduction 33
The VAT Rate Increase: An Ideal Natural Experiment to Estimate the IES 37
The Intertemporal Substitution Response to the VAT Rate Increase 41
Characterizing the Intertemporal Substitution Response to the VAT Rate Increase 49
Conclusion 63
References 68
III. The Intertemporal Substitution and Income Effects of GST Rate Increases: 96
Evidence from New Zealand
Abstract 96
Introduction 97
Theoretical Framework 100
GST in New Zealand 105
Data 110
Empirical Methodology 113
Results 119
Discussion 124
Conclusion 130
References 158

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LIST OF TABLES

TABLE

I.1. Summary Statistics 20
I.2. Estimates of the Intertemporal Elasticity of Substitution (IES) 21
I.3. Robustness Checks 22
I.4. Heterogeneity in the IES Estimate Across Household Types 23
I.5. Arbitrage Effects for Storables and Durables 24
I.A.1. Categorization of Goods and Services Subject to the VAT 30
II.1. Summary Statistics 65
II.2. Baseline Structural Parameter Estimates 66
II.3.Sensitivity of the Structural Parameter Estimates to Fixed Parameter Values 67
II.A.1. Categorization of Goods and Services Subject to the VAT 87
III.1. Estimated Impact of GST Rate Increases on Price Levels 132
III.2. Retail Trade Survey Summary Statistics 133
III.3. Percentage Deviation in Retail Sales from Trend 134
III.4. Retail Trade Survey Industries that Experienced a Significant Increase in Retail Sales 136
the Month Prior to a GST Rate Increase
III.5. F-tests of Null Hypotheses That All Intertemporal Substitution Occurred Within 137
Specified Period
III.6. Average Percentage Change In Quarterly Retail Sales Since "Announcement" 138
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III.A.1. Wholesale Sales Tax Rates Prior to Repeal 151
III.A.2. Goods and End Users Exempt from the WST 152
III.A.3. ANZSIC06 Retail Trade Survey Industries and ANZSIC06 Class Codes and 153
Descriptions
III.A.4. ANZSIC Industry Classification for RET Series 154
III.A.5. Assignment of RTS Industries to “Durable” and “Non-Durable” Categories 156
III.A.6. Months Allowing for Tax Effects in Intertemporal Substitution Estimation 157

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LIST OF FIGURES

Figure

I.1. Percentage Change in Non-Storable Non-Durable Prices 25
I.2. Average Interest Rate on Short-Term Loans and Discounts 26
I.3. Articles Mentioning the Phrase ‘Consumption Tax’ 27
I.4. Price Ratios 28
I.5. Identification of the Intertemporal Substitution Effect 29
II.1. Articles Mentioning the Phrase ‘Consumption Tax’ 68
II.2. Seasonally-Adjusted Percentage Change in Prices of Goods and Services Subject to 69
the VAT
II.3. Average Interest Rate on Short-Term Loans and Discounts 70
II.4. Identifying the Intertemporal Substitution Response to the VAT Rate Increase 71
II.5. The Intertemporal Substitution Response to the VAT Rate Increase 72
II.6. The Storable Intertemporal Substitution Response to the VAT Rate Increase 73
II.7. The Durable Intertemporal Substitution Response to the VAT Rate Increase 74
II.8. The Costs and Benefits of Adjusting the Durable Stock at the Margin 75
II.9. The Costs and Benefits of Stockpiling at the Margin 76
II.10. Comparison of the Time Path of Expenditures Generated by the Model to the 77
Empirical Estimates
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II.11. Non-storable Non-durable Expenditure Patterns for Different Values of when 78

II.12. Durable Expenditure Patterns for Different Values of when 79
II.13. Non-storable Non-durable Expenditure Patterns for Different Values of 80
II.14. Durable Expenditure Patterns for Different Values of 81
II.15. Durable Expenditure Patterns for Different Values of 82
II.16. Expenditure Patterns for 83
II.17. Predicting the Response to New Zealand’s July 1989 GST Rate Increase 84
II.18. The (Hicks) Compensated Expenditure Response to Japan’s Proposed VAT Rate 85
Increase
II.A.1. The Impact of an Increase in the Real Interest Rate When Households are Net 86
Savers
II.C.1. Marginal Excess Burden ( ) 93

II.C.2. Marginal Excess Burden ( ) 93

III.1A. Uncompensated consumption tax rate increase with no lump-sum rebate 139
III.1B. Uncompensated consumption tax rate increase with lump-sum rebate 139
III.2. Compensated consumption tax rate increase 140
III.3A. RET Seasonally-Adjusted Monthly Retail Sales 141
III.3B. RET Seasonally-Adjusted Quarterly Retail Sales 141
III.4A. RTT Seasonally-Adjusted Monthly Retail Sales 142
III.4B. RTT Seasonally-Adjusted Quarterly Retail Sales 142
III.5. Identifying the Intertemporal Substitution Effects of a GST Rate Increase 143
III.6A. Percent Deviation from Detrended Average 144
III.6B. Percent Deviation from 1985 Q3 Retail Sales 144
x