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The Power to Pass on Taxes - A Test for Tax Shifting based on Observables

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  • Mario Jametti

    ()
    (Istituto di Economia Politica (IdEP), Facoltà di Scienze Economiche, Università della Svizzera italiana, Svizzera)

  • Agustin Redonda

    ()
    (Istituto di Economia Politica (IdEP), Facoltà di Scienze Economiche, Università della Svizzera italiana, Svizzera)

  • Anindya Sen

    ()
    (Department of Economics, University of Waterloo, Canada)

Abstract

Since 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 Info

Paper provided by USI Università della Svizzera italiana in its series Quaderni della facoltà di Scienze economiche dell'Università di Lugano with number 1301.

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Length: 41 pages
Date of creation: 2013
Date of revision:
Handle: RePEc:lug:wpaper:1301

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Web page: https://www.bul.sbu.usi.ch

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Keywords: Tax Incidence; Pass-through; Market Structure;

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  12. Marina Di Giacomo & Massimiliano Piacenza & Gilberto Turati, 2009. "Are "Flexible" Taxation Mechanisms Effective in Stabilizing Fuel Prices? An Evaluation Considering the Italian Fuel Markets," Working papers 7, Former Department of Economics and Public Finance "G. Prato", University of Torino.
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