Tuesday, April 22, 2014

A new research paper on the "Amazon.com Tax". LOTS of lessons for Microeconomics!

Via Business InsiderTHIS LINK is to a paper that researched the effect that levying State Sales Taxes on online purchases from Amazon.com. The results are an Economics teachers dream!  There are MANY basic microeconomics concepts explicitly discussed and illustrated.

This from the conclusion:
Internet taxation is an important issue that will continue to be debated for years to come.
Despite the importance of widespread “Amazon Tax” laws, little is currently known about their
effect on the demand for Internet retailers such as Amazon.com and whether the implementation of such laws leads to substitution effects such as bolstering local sales at brick-and-mortar stores when online retailers’ sales tax price advantage is removed.  
Using transaction-level data of 1.4 million households, we identify the effects of Amazon 
Taxes on the purchasing behavior of residents living in five states that adopted such laws over 
2012–2013. We find that Amazon sales fall by 9.5% after implementation of an Amazon Tax, corresponding to an elasticity of –1.3. We find the effect to be more concentrated in large purchases, such as those over $300. For this subset of purchases, we find that Amazon sales fall by 23.8% after implementation of the Amazon Tax, corresponding to an elasticity of –3.2.
I see an opportunity to learn the Substitution Effect, availability of Substitutes, elasticity of demand, incidence of taxation and who bears the burden of the tax, and Dead Weight Loss as the result of taxation.  A veritable cornucopia!! :)

The tax raises the price of the good BUT not by the full amount of the tax, dependent upon relative elasticities between buyers and sellers.  Because consumers are price sensitive (elasticity of 1.3) they decrease their Quantity Demanded (Point "A" to Point "B" along the "D*") because they have other online options with no sales taxes collected ("Substitution Effect").

The new Market Quantity will be at "Q1", less than it was prior to the tax.  So, solely due to the levying of the Sales Tax, Dead Weight Loss was created.  This means that there is a quantity of the good consumers don't get to enjoy at a lower price (area of Demand Curve represented by BLUE Triangle) and there is a quantity of the good that Amazon does not get to supply at a higher price (Red Triangle).

Notice the RED triangle is larger than the BLUE one.  This means that Amazon will bear a larger portion of the tax and will not be able to fully pass it on to the consumer. If they did, it would make things much worse for them. Consumers would move further UP and to the LEFT on the Demand curve, making the quantity sold even lower.

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