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

Author Info

Listed author(s):
  • 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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File URL: http://doc.rero.ch/record/32089/files/wp1301.pdf
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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
Handle: RePEc:lug:wpaper:1301
Contact details of provider: Web page: https://www.bul.sbu.usi.ch

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

Other versions of this item:

Find related papers by JEL classification:
  • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
  • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
  • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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  1. Marion, Justin & Muehlegger, Erich, 2011. "Fuel tax incidence and supply conditions," Journal of Public Economics, Elsevier, vol. 95(9), pages 1202-1212.
  2. Philip DeCicca & Donald Kenkel & Feng Liu, 2013. "Who Pays Cigarette Taxes? The Impact of Consumer Price Search," The Review of Economics and Statistics, MIT Press, vol. 95(2), pages 516-529, May.
  3. 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.
  4. A. Colin Cameron & Jonah B. Gelbach & Douglas L. Miller, 2008. "Bootstrap-Based Improvements for Inference with Clustered Errors," The Review of Economics and Statistics, MIT Press, vol. 90(3), pages 414-427, August.
  5. Brulhart, Marius & Jametti, Mario, 2006. "Vertical versus horizontal tax externalities: An empirical test," Journal of Public Economics, Elsevier, vol. 90(10-11), pages 2027-2062, November.
  6. Delipalla, Sophia & O'Donnell, Owen, 2001. "Estimating tax incidence, market power and market conduct: The European cigarette industry," International Journal of Industrial Organization, Elsevier, vol. 19(6), pages 885-908, May.
  7. Chouinard Hayley H & Perloff Jeffrey M, 2007. "Gasoline Price Differences: Taxes, Pollution Regulations, Mergers, Market Power, and Market Conditions," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 7(1), pages 1-28, January.
  8. Pamela Palazzi, 2011. "Taxation and Innovation," OECD Taxation Working Papers 9, OECD Publishing.
  9. Hausman, Jerry & Stock, James H. & Yogo, Motohiro, 2005. "Asymptotic properties of the Hahn-Hausman test for weak-instruments," Economics Letters, Elsevier, vol. 89(3), pages 333-342, December.
  10. Moulton, Brent R., 1986. "Random group effects and the precision of regression estimates," Journal of Econometrics, Elsevier, vol. 32(3), pages 385-397, August.
  11. repec:tur:wpaper:7 is not listed on IDEAS
  12. Besley, Timothy J. & Rosen, Harvey S., 1999. "Sales Taxes and Prices: An Empirical Analysis," National Tax Journal, National Tax Association, vol. 52(2), pages 157-178, June.
  13. Karp, Larry S & Perloff, Jeffrey M, 1989. "Estimating Market Structure and Tax Incidence: The Japanese Television Market," Journal of Industrial Economics, Wiley Blackwell, vol. 37(3), pages 225-239, March.
  14. Devereux, M.P. & Lockwood, B. & Redoano, M., 2007. "Horizontal and vertical indirect tax competition: Theory and some evidence from the USA," Journal of Public Economics, Elsevier, vol. 91(3-4), pages 451-479, April.
  15. Masayoshi Hayashi & Robin Boadway, 2001. "An empirical analysis of intergovernmental tax interaction: the case of business income taxes in Canada," Canadian Journal of Economics, Canadian Economics Association, vol. 34(2), pages 481-503, May.
  16. Jeffrey M. Wooldridge, 2003. "Cluster-Sample Methods in Applied Econometrics," American Economic Review, American Economic Association, vol. 93(2), pages 133-138, May.
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Cited by:

  1. Salvador Barrios & Gaetan Nicodeme & Antonio Jesus Sanchez Fuentes, 2014. "Effective Corporate Taxation, Tax Incidence and Tax Reforms: Evidence from OECD Countries," Taxation Papers 45, Directorate General Taxation and Customs Union, European Commission.
  2. Dora Benedek & Ruud A. de Mooij & Michael Keen & Philippe Wingender, 2015. "Estimating VAT Pass Through," CESifo Working Paper Series 5531, CESifo Group Munich.
  3. Di Giacomo, Marina & Piacenza, Massimiliano & Scervini, Francesco & Turati, Gilberto, 2015. "Should we resurrect ‘TIPP flottante’ if oil price booms again? Specific taxes as fuel consumer price stabilizers," Energy Economics, Elsevier, vol. 51(C), pages 544-552.

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