One of the most fundamental questions in public finance is who bears the burden of taxes -- the incidence of taxation.' Our understanding of incidence from an empirical standpoint is quite meager. Indeed, there seems to be little evidence even in the case that is theoretically the easiest -- partial equilibrium commodity taxes. Are taxes levied on commodities completely shifted into their prices, or does the incidence also fall on firms? How long does the shifting process take? In this paper we employ a unique data source to examine the incidence of sales taxes. The main idea is to take information on the prices of specific commodities in different U.S. cities and to examine the extent to which differences in tax rates and bases are reflected in prices, controlling for other factors (such as costs). We find a surprising variety of shifting patterns. For some commodities, the after-tax price increases by exactly the amount of the tax, a result consistent with the standard competitive model. However, taxes on other commodities are overshifted -- an increase in tax revenue of one dollar per unit increases the price by more than one dollar.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
6667.
Length: Date of creation: Jul 1998 Date of revision: Handle: RePEc:nbr:nberwo:6667
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Find related papers by JEL classification: H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Laurence J. Kotlikoff & Lawrence H. Summers, 1988.
"Tax Incidence,"
NBER Working Papers
1864, National Bureau of Economic Research, Inc.
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Kotlikoff, Laurence J. & Summers, Lawrence H., 1987.
"Tax incidence,"
Handbook of Public Economics,
in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 2, chapter 16, pages 1043-1092
Elsevier.
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Carlton, Dennis W, 1986.
"The Rigidity of Prices,"
American Economic Review,
American Economic Association, vol. 76(4), pages 637-58, September.
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