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

  • 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)

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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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
Contact details of provider: Web page: https://www.bul.sbu.usi.ch

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  1. Marion, Justin & Muehlegger, Erich, 2010. "Fuel Tax Incidence and Supply Conditions," Working Paper Series rwp10-014, Harvard University, John F. Kennedy School of Government.
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  11. Anindya Sen & Peter G.C. Townley, 2010. "Estimating the Impacts of Outlet Rationalization on Retail Prices, Industry Concentration, and Sales: Empirical Evidence from Canadian Gasoline Markets," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 19(3), pages 605-633, 09.
  12. Pamela Palazzi, 2011. "Taxation and Innovation," OECD Taxation Working Papers 9, OECD Publishing.
  13. Doug Miller & A. Colin Cameron & Jonah B. Gelbach, 2006. "Bootstrap-Based Improvements for Inference with Clustered Errors," Working Papers 621, University of California, Davis, Department of Economics.
  14. 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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