Suppose Illinois decides to end the state income tax exemption for retirement income in 2015. You...

 

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Suppose Illinois decides to end the state income tax exemption for retirement income in 2015. You are interested in the effect on retiree spending on food away from home (for example, going out to restaurants). You observe the following information: Table 1: Elderly Spending on Food Away from Home, Illinois Year Spending 2010 $1100 2012 $1200 2014 2016 $1300 $1200 1. Your friend argues that the best guess for the change in spending is a decrease of $100, but you think the true effect was larger, because spending was trending upwards before the end of the exemption. Which do you think is a better estimate? Explain, using the logic of difference-in-differences. 2. Suppose you find information on Indiana, a neighboring state that did not change its policy during these years. These data are reported in Table 2. Table 2: Elderly Spending on Food Away from Home, Indiana Year Spending 2010 $1000 2012 $1100 2014 $1200 2016 $1400 Given this information, what is your best guess for the effect of the tax increase on spending on food away from home? Explain why the difference-in-differences analysis reaches a different conclusion than in the first part. Suppose Illinois decides to end the state income tax exemption for retirement income in 2015. You are interested in the effect on retiree spending on food away from home (for example, going out to restaurants). You observe the following information: Table 1: Elderly Spending on Food Away from Home, Illinois Year Spending 2010 $1100 2012 $1200 2014 2016 $1300 $1200 1. Your friend argues that the best guess for the change in spending is a decrease of $100, but you think the true effect was larger, because spending was trending upwards before the end of the exemption. Which do you think is a better estimate? Explain, using the logic of difference-in-differences. 2. Suppose you find information on Indiana, a neighboring state that did not change its policy during these years. These data are reported in Table 2. Table 2: Elderly Spending on Food Away from Home, Indiana Year Spending 2010 $1000 2012 $1100 2014 $1200 2016 $1400 Given this information, what is your best guess for the effect of the tax increase on spending on food away from home? Explain why the difference-in-differences analysis reaches a different conclusion than in the first part.