The Political Economy of Sales Taxes and Sales Tax Exemptions

We analyze the choice politicians face when seeking votes from groups that lobby for sales tax rate decreases or from groups that lobby for certain tax exemptions, given the constraint that politician wants to raise a certain amount of revenue. Using the application of sales taxes and sales tax exemptions we develop a model predicting a positive relationship between the number of sales tax exemptions and the sales tax rate. We find support for the hypothesis that there is an equilibrium relationship between tax rates and exemptions. We find that a one-unit increase in the number of exemptions is associated with an increase between 0.10 and 0.25 percent increase in the sales tax rate.