The incidence of non-linear price-dependent consumption taxes

Abstract

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.