Tuesday, January 22, 2013

Sales Taxes and Borders

I had an interesting conversation yesterday about sales taxes, state borders, and the pricing and availability of products on either side of the border.

Here's the background -- Washington has a sales tax, but Oregon does not.  In addition, the Portland metropolitan area spills over into both states, which provides some fertile ground for thinking about this issue because there is a lot of economic activity taking place on either side of the border.

An interesting feature of the Washington sales tax law is that it is a tax on use, not just point of sale.  Thus, Washington residents who buy refrigerators, stereos, cars and other durable goods from Oregon retailers are technically supposed to pay sales taxes on those items because they will be used in Washington.  My impression is that the same would go for groceries (at least the groceries that are not eaten before returning to Washington!).  In practice, however, people are not likely to pay a sales tax if they are not likely to be caught.

On the flip side, the fact that Washington's tax is a tax on use means that Oregon customers who shop in Washington can waive the sales tax at the point sale just by showing an Oregon driver's license.  Putting yourself in the shoes of a Washington retailer near the border, you may want to cut your prices to compete with the Oregon retailers (so that your tax inclusive price is more competitive), but this price cut applies to all of your customers.  As a result, it might be the case (theoretically) that the Oregon customers find cheaper products across the border in Washington.  It would be weird, but it is possible.

A final -- and very important consideration -- is whether it is worth crossing the border to buy the product.  If the transaction and transportation costs are too high, you would not cross-border competition.  For example, who is going to drive half an hour for an 8 percent discount on Godiva chocolate?  An 8 percent discount on a flat screen TV, however, could be worth it.  From my conversation, it turns out that this distinction matters, but not for all expensive products.  As the products become more expensive, they also become easier to detect (as a general rule).  The problem is that a 70 inch TV may have to be delivered, and in that case, Washington can more easily enforce the use tax (just implement the tax on delivery).  A related issue occurs with cars -- they'll have to be registered in Washington state, and you get hit with the tax at that point.

As you can imagine, the tax structure of the region may affect a firm's decision to locate on one side of the border versus the other.  More generally, borders are an interesting setting in which to study economics.  A couple of examples: Here (gated) is a recent paper I came across that thinks about cross-border shopping, and here's a (now) classic article that uses cross-border cross-time variation in advertising law to think about the effect of advertising.

The ideas in this post are based on a conversation with a Reed College professor, Jeff Parker, who had a student whose undergraduate thesis fleshed out these issues.  If I can get my hand on a copy of that thesis, I'll share a link.

Friday, January 18, 2013

Man Outsources Own Job

Here is an amazing story that caught my eye this week.  A man outsourced his own job, and did well by doing so... for a while.
While the developer was working 9-to-5, Bob surfed the Web. At 9, he'd roll in and surf Reddit, watching cat videos. At 11:30 he'd grab some lunch. After lunch it was time for EBay for about an hour, when Bob migrated to Facebook. At 4:30, he'd email management, telling them what he had "done" during the day, and at 5, he'd go home. 
"Evidence even suggested he had the same scam going across multiple companies in the area. All told, it looked like he earned several hundred thousand dollars a year, and only had to pay the Chinese consulting firm about fifty grand annually," Valentine writes.

Apparently, Bob was considered to be the company's best software developer until they discovered his scheme.

Saturday, January 12, 2013

Cops and Robbers in the Abstract

I came across an interesting paper that seems particularly relevant given the current political debate about gun control.  The paper written by John H. Boyd, Abu M. Jalal and Jin Kim is titled "A general equilibrium investigation of handguns, cops and robbers."  Here is the abstract:
We study a general equilibrium environment in which the only activity of interest is armed robbery.  Agents choose to be citizens or robbers, and to purchase handguns or not.  By arming, citizens can protect themselves from robbery.  The government chooses the intensity of police efforts to arrest would-be robbers and to arrest citizens who arm for self-defense.  Properties of an equilibrium are characterized and comparative statics results are obtained.  We then show why empirical work that examines variations in "shall issue" laws could lead to wrong conclusions.  Our analysis produces counterexamples to the following propositions: raising the arrest rate of robbers reduces crime; increasing the arrest rate of armed citizens reduces the number of armed citizens (crime rate, gun death rate).
Here is a link to an earlier ungated version of the paper.  Interestingly, the abstract for the earlier version is somewhat different.
We study a theoretical general equilibrium environment in which the only activity of interest is armed robbery.  Agents choose whether to be citizens or robbers, and whether to purchase handguns.  Armed citizens can protect themselves from robbery but any armed agent runs the risk of accidentally shooting himself or another agent.  The government chooses a gun tax, and the intensity of police efforts to arrest would-be robbers and citizens who arm for self-defense.  Properties of equilibrium are characterized and the model is calibrated and solved.  In all cases unique equilibria are obtained.  We find that guns are an inefficient way of redistributing wealth, in the sense that social costs are very large relative to the actual wealth redistribution.  In this model society would be vastly better off if handguns could be eliminated.  We do find, however, that handguns substantially deter crime when crime is defined as taking another's wealth by force.  Yet handguns cause accidental deaths and resultantly in this model policymakers confront a fundamental trade-off between property rights and gun deaths.
I have not read both versions of the paper to see how much the content of the paper had changed, but it is interesting to see how the peer review / journal publication process changes the tone of an abstract. There are plenty of changes, but to me, the most substantive change to the abstract is the target audience.  The published abstract (top) appeals much more to an economic theorist, while the working paper abstract (bottom) appeals more to someone interested in the determinants of crime.  This is no accident.  The paper is published in Economic Theory.

Tuesday, January 1, 2013

New Year's Resolutions

In honor of the New Year, here is a Slate article on How to Make Better New Year's Resolutions by Ray Fisman.  The punchline: "vow to do less, not more."  In addition, I found the following two passages to be most interesting:
It’s not that the poor don’t think enough about money, or the busy about their time—it’s that they think about it too much. Shafir likes to cite a survey the researchers did at Boston’s South Station. They asked arriving train passengers what the starting fare is on Boston taxis. Rich travelers take more cabs than poor ones, but low-income respondents were much more likely to know what it costs to take a cab, because in thinking about the decision between taking a cab or a bus, a couple of dollars one way or another really matters. This attentiveness ensures that they have enough cash to finish the day, but all of these immediate distractions—deciding whether to buy a muffin or some other minor indulgences; comparison shopping cereal brands; calculating and recalculating expected expenses against a dwindling bank balance—threatens to leave no mental space to consider the bigger picture of managing finances for the long-term. (The time-scarce similarly expend so much effort dealing with the minutiae of getting through the day that they fail to think about making their lives less harried and more productive in the future.)
And, for something more closely related to making your resolutions:
But occasional periods of self-reflection—like the days of reckoning that arrive in late December each year—provide an opportunity to think about what we want to put in the suitcase that constitutes our lives. The advice that Mullainathan and Shafir have for resolution-makers isn’t that you refrain from trying to better yourself, but rather that you lock in commitments to self-betterment that won’t require vigilance or attention in the year ahead. So while it’s on your mind, go ahead and increase the default contribution to your pension plan; buy a smaller fridge that won’t hold as much ice cream; force Outlook to block off every Friday afternoon to clean up your desk and the rest of your affairs; and use both the time and mental space that commitments like these can free up to stay on top of the workload and pressures that are already part of your daily life.
The rest of the article is worth a read too, but in making your New Year's commitments, the best advice you can get from an economist: make those commitments credible.  Happy New Year!