Dollars and Jens
Saturday, August 14, 2004
Holiday in August
Today is a sales-tax holiday in the Commonwealth of Massachusetts (the first ever, I believe). I got pants.

Economists generally frown on sales-tax holidays, because a government can generally stimulate the economy more with less loss of revenue by cutting taxes permanently -- a lot of the extra spending done on a sales-tax holiday displaces spending that would have occurred without the holiday, and would have been taxed. But a point in favor of tax-holidays has occurred to me: it allows a certain amount of price-discrimination.

Price-discrimination, as you may know, is the attempt to offer lower prices to more price-sensitive consumers than to less price-sensitive consumers. For example, a local video-rental chain has two-for-one deals on Tuesdays. People who don't care much about spending the $4.50 on a video rental, but prefer to rent on a day other than Tuesday, pay the higher price. But customers who wouldn't visit the store if they had to pay the $4.50 can wait until Tuesday, and aren't driven off.

By providing a sales-tax holiday, the government can push sales taxes onto those consumers who are more willing to pay them. Consumers who can afford them less -- or who are simply stingier -- will shop on the holiday, rather than being pushed out of buying altogether. Tax holidays don't make for effective economic stimulus, but they might mitigate the inefficiencies that sales taxes create.

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