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Is Tax Shifting Asymmetric? Evidence from French VAT reforms, 1995-2000

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Clément Carbonnier

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Abstract

This paper presents evidence from three French VAT reforms showing that tax shifting on prices operates differently upwards and downwards. This may appear as a paradox when reading usual studies on price shifting. This paper puts forward two different asymmetric effects. The first one is linked to asymmetries in firms' supply curves, which imply that price decreases are smaller than price increases. It occurs because firms decrease their production more easily than they increase it. The second asymmetric effect is linked to asymmetries in customers' demand curves, which react with higher intensity to big price changes than to tenuous ones. Therefore, in markets with monopolistic firms or with collusion - markets that better consider the variations of the demand because of the price making power of firms - price increases are relatively weak in order to prevent the fall of the demand, and price decreases are relatively strong in order to take profit of the takeoff of the demand. This paper shows that this second effect can counteract the first effect in markets with high fixed costs.

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Paper provided by PSE (Ecole normale supérieure) in its series PSE Working Papers with number 2005-34.

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Date of creation: 2005
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Handle: RePEc:pse:psecon:2005-34

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  10. Dierickx, I. & Matutes, C. & Neven, D., 1988. "Indirect taxation and cournot equilibrium," International Journal of Industrial Organization, Elsevier, vol. 6(3), pages 385-399. [Downloadable!] (restricted)
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  15. Delipalla, Sofia & Keen, Michael, 1992. "The comparison between ad valorem and specific taxation under imperfect competition," Journal of Public Economics, Elsevier, vol. 49(3), pages 351-367, December. [Downloadable!] (restricted)
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