The Power to Pass on Taxes - A Test for Tax Shifting based on Observables
AbstractSince gasoline has a relatively inelastic demand, raising government revenue via gasoline taxes could appear appropriate as it entails a relatively small deadweight loss. However, gasoline retail is generally a highly concentrated market, hence the assumption of perfect competition when considering tax incidence might be misleading. Theoretically, in oligopolistic markets taxes can be shifted forward less (more) than proportionally to retail prices; a possibility usually denoted by undershifting (overshifting). Generally, this depends on unobservable parameters of the demand and cost functions. In this paper we device a novel empirical test, based on observables, to assess whether taxes are under- or overshifted in an oligopolistic market. The test depends on the interaction between market structure and taxes. We apply our test to the Canadian retail gasoline market using a panel data set of 10 cities, finding that gasoline taxes are undershifted.
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Bibliographic InfoPaper provided by USI Università della Svizzera italiana in its series Quaderni della facoltà di Scienze economiche dell'Università di Lugano with number 1301.
Length: 41 pages
Date of creation: 2013
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Tax Incidence; Pass-through; Market Structure;
Other versions of this item:
- Mario Jametti & Agustin Redonda & Anindya Sen, 2013. "The Power to Pass on Taxes - A Test for Tax Shifting Based on Observables," CESifo Working Paper Series 4265, CESifo Group Munich.
- H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-06-04 (All new papers)
- NEP-ENE-2013-06-04 (Energy Economics)
- NEP-PBE-2013-06-04 (Public Economics)
- NEP-PUB-2013-06-04 (Public Finance)
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