Comparison of retail price indices with and without indirect taxes

Abstract

A price index based on consumer prices but calculated after deduction of the indirect tax content in these prices is published in some countries for index linking purposes and has been a subject of discussion in several countries. One question often raised is the effect to be expected in an index w hen the tax content is deducted compared with a consumer price index including indirect taxes. On the basis of Danish experience the development of two such indices is described in this article, and a comparison is made between the increases of the two indices during the period 1963–1981, in which considerable increases in indirect taxation took place. The conclusions concentrate on the overall increase for this period, in which the consumer prices (including taxes) rose to index 404. The index of ‘net’ prices (excluding taxes) rose to 361, which is a difference of only 12 per cent compared with the consumer price index over an 18-year period, in spite of a 6.5-fold increase in the indirect taxes. An attempt is made to explain the technical aspects of the construction of an index excluding indirect taxes. These aspects are often overlooked in general discussions on the subject.