The incidence of non-linear price-dependent consumption taxes

a r t i c l e i n f o The present article generalizes economic literature on the incidence of consumption taxes to general schedules of consumption taxes dependent on price. Previous studies were limited to the cases of per unit and ad valorem taxes. Three main contributions are made. Methodologically, the elasticity of the tax function is introduced as a new parameter so that the price-elasticity of general consumption tax schedules in different models of imperfect competition might be dealt with in a tractable manner. Theoretically, existing results on the difference between the incidence of ad valorem and per unit consumption taxes are generalized to non-linear consumption taxes: the larger the elasticity of the tax function, the smaller the share of consumption tax borne by consumers. From the perspective of applied public economics, it is shown how the regulator may reduce prices in very uncompetitive markets by increasing the elasticity of the consumption tax on a targeted range of producer prices. Taxes are not always borne by the agent intended by fiscal authorities. This has been an issue of economic analysis at least since Quesnay (1759) argued that each and every tax levied under the French ancient régime was ultimately borne by landlords. Subsequently, Smith (1776) and Ricardo (1821) identified the way in which various taxes were borne by different agents (e.g.: luxury good consumers, landlords, and capitalists — at least for that share of profit not representing a risk premium), the question of tax incidence thereby becoming a major issue of economic analysis. For consumption taxes, there is an extensive literature dealing with ad valorem and per unit taxes, but there is little on more general consumption taxes. The aim of the present paper is to remedy this gap, generalizing existing economic literature on the incidence of consumption taxes to general forms of price-dependent tax schedules. Consumption tax schedules are generally dependent upon price, and not on quantity: consumption is mainly anonymous, so tax schedules cannot be related to the quantities purchased. Hamilton (1999) analyzed the regulation of oligopolies with consumption tax schedules related to the entire market output. Tax schedules of this kind lack one of the main advantages of consumption taxes: the payment of tax at the point of each transaction. Hence the present paper analyzes the impact of consumption taxes whose schedules depend on the actual producer prices for the transaction. Furthermore, this paper …