Thursday, April 24, 2014

The Sequel --"The Amazon Tax---Part 2"

Prompted by an observation by my cyber friend The New Arthurian, I an revising my posting on the "Incidence of Taxation" regarding The "Amazon Tax"---not the rain-forest in Brazil but the online merchant Not because it is necessarily wrong, but it makes some implicit assumptions that conform to what the College Board AP curriculum requires.

Meaning, it assumes markets clear, the participants respond "rationally" to the incentives before them and prices are "flexible" upward or downward. Lots of qualifying assumptions, ehh?

Here is the more likely scenario IN THE SHORT RUN for

Prices in the short run are more likely to be "sticky", particularly sticky downward.  This will be especially so for a national retailer like that sells in all States.  Because the sales tax is not administered uniformly across the US the final price, including the sales tax,  paid by consumers is going to be different.

ALL customers see this when they checkout and have to enter a shipping address.  The amount of the sales tax pops up and they IMMEDIATELY see they are paying and some are not.  Some/Many go ahead and purchase anyway.  Some/Many get mad, log-off and (1) don't buy anything (2) seek a site where they don't overtly charge the tax or the price is cheaper (3) go to a local "brick and mortar" store to seek a better deal.
All these possibilities are discussed in the research paper that can be found HERE.

The graphs I created below illustrate what is happening in the States that requires the collection of sales tax on Amazon purchases BEFORE and AFTER the imposition of the tax.

The study cited above clearly indicates that for Amazon there is significant "elasticity of demand" in regards to the affect of the sales tax.  It is -1.3 for purchases under $300.00 and a whooping -3.2 for purchases over $300.00.

The graphs have the explanation embedded on them but the key points are:

(1) the Supply Curve is Perfectly Elastic (horizontal) over a range of Quantity Supplied as prices are "sticky" and not likely to respond to downward pressure.

(2) Demand is relatively Elastic. Consumers are sensitive to changes in prices in terms of the their quantity demanded for a good at a particular price, especially if viable Substitutes are available.

(3) In light of this, Consumers will bear the burden of the tax to the tune of 100% and will experience 100% of the "Dead Weight Loss".

Is this analysis perfect? No. Probably the best course of action would be to take the prior posting, add it to this one then divide by 2.  There! That is how I will leave it.  :)

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