97. Analyzing the Incidence of Consumption Taxes

MATTI VIREN. 2007. ANALYZING THE INCIDENCE OF CONSUMPTION TAXES.  Pellervo Economic Research Institute Working Papers No. 97. p. 30.   ISBN 978-952-5594-58-4 (NID), ISBN 978-952-5594-59-1 (PDF), ISSN 1455-4623 (NID), ISSN 1796-4784 (PDF). 
Abstract: This paper deals with the question of how consumption taxes, especially the value-added tax, affect consumption prices. The analyses are based on data from EU countries for the period 1970-2004. The starting point is a conventional supply-demand analysis of the tax incidence problem. This problem is solved using some simple price mark-up equations, Phillips curves and inflation forecast error equations. All these equations are estimated from panel data from EU countries using different estimators and variable specifications. In addition, an analysis is carried out with Finnish excise taxes using commodity/outlet level micro data for the early 2000s. A general result of all analyses is that more than one half of a tax increase shifts to prices.   
Keywords: Value-added tax, tax incidence, consumption taxes