Abstract

We investigate the impact that seemingly uniform tax policies have on shaping the retail landscape. Using comprehensive data about all retail establishments in the United States from 1990 to 2014, we first show that while retail establishments are more likely to open in markets with favorable state tax policies, it is primarily the largest chains that are contributing towards this effect on entry. Motivated by these empirical realities, we analyze an entry model where firms are subject to taxes to demonstrate that tax effects on retailer entry can potentially amplify market dominance, such that retailers with preexisting size-based advantages are disproportionately more responsive to the tax policies. Furthermore, we show that revenue-maximizing tax levels that the government could set have the potential to exacerbate the dominance of strong firms. Finally, we provide calibrated model analysis based on data about home improvement retail chain entry. This calibration exercise illustrates the economic magnitude associated with asymmetric retail entry responses to tax policy.

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