The Welfare Effect of Marginal and Nonmarginal Changes in Sales Taxes in the U.S.

We study the welfare effects of marginal and larger sales tax reforms in the U.S. Using a panel of sales taxes, we find that demand is relatively inelastic and that consumers bear the full incidence of the tax changes. We use these estimates to point identify or bound the welfare effects of both marginal and larger changes in sales taxes. We analyze how the welfare effects vary across states depending on initial prices and nonlinearities in the demand curve. We find that the marginal value of public funds for both marginal and larger changes are close to one.