Estimating Both Supply and Demand Elasticities Using Variation in a Single Tax Rate

Abstract

APPENDIX A: EXTENSIONSIN THIS APPENDIX, we consider three extensions to our main result derived in Section 2. The extensions are (i) supply-side instead of demand-side taxation, (ii) nonlinear, instead of ad valorum taxation, and (iii) a setting with multiple goods and multiple taxes. A.1. Supply-Side TaxationTo extend our result to supply-side taxation, we again start out with the most general formulation of the supply-demand system given by equations (1), (2). However, we now assume the tax τ it is levied on the supply side. Because the tax is levied on the supply side, we need to slightly adjust the exclusion restrictions formulated in Section 2. In particular, in this setting, the logically equivalent SER is that the instrument can be excluded from the demand equation, because the tax is paid for by the supply side: SUPPLY-SIDE STANDARD EXCLUSION RESTRICTION:If the tax τ it is levied on the supply side, then we set γ = 0.The logical equivalent of the RER with supply-side taxation is that supply depends only on the price net of the tax rate denoted by P −τ it = (1 − τ it )P it . The motivation for the supply-side RER is similar to the motivation of the demand-side RER: it follows from rational behavior of producers, and is a standard assumption in most models of taxation. Under the supply-side RER, the supply equation is given by y it = ε S p

The Return to Protectionism

“…We use variation in U.S. import tariffs to estimate the variety import demand and export supply elasticities simultaneously. The strategy of identifying two elasticities with one instrument was applied by Romalis (2007) in a trade context and studied by Zoutman et al (2018) in the context of applications to public finance. Intuitively, tariffs create a wedge between what the importer pays and what the exporter receives.…”

“…This estimation approach was first applied byRomalis (2007) to study the effects of NAFTA and recently formalized byZoutman et al (2018).…”

the General Equilibrium Incidence of the Earned Income Tax Credit

“…estimate the parameters in two separate steps (Zoutman et al, 2018;Watson, 2020). 37 I identify the labor supply elasticities, ε L EITC change, the remaining skill-level variation in the EITC is due to demand shocks.…”

Inferring Tax Compliance from Pass-Through: Evidence from Airbnb Tax Enforcement Agreements

“…We use the same approach to find that the enforcement of a 10% tax reduces nights booked by 3.6%. Adapting an intuitive result, explained nicely by Zoutman et al (2018), we use the estimated effects on price and quantity to infer price elasticity of demand and bound price elasticity of supply. In particular, the estimated effects of the enforced tax rate on the price paid to hosts and nights booked imply an average price elasticity of demand of −0.48.…”