Excise taxes, consumer demand, over-shifting, and tax revenue

Donald H. Dutkowsky, Ryan S. Sullivan

Research output: Contribution to journalArticle

6 Scopus citations

Abstract

This paper examines over-shifting in excise taxes, using the constant elasticity demand function under monopolistic competition. We apply the solution for price from this model to previous studies to obtain estimated price elasticities of demand. We also derive the excise tax, which maximizes tax revenue under this formulation, resulting in a revenue-maximizing tax-price ratio based upon the price elasticity. The model is applied to some previous experience regarding excise tax increases for alcoholic beverages and cigarettes. Our study offers structural insights behind empirical research that finds over-shifting. The model can also be used to help construct excise tax policy.

Original languageEnglish (US)
Pages (from-to)111-125
Number of pages15
JournalPublic Budgeting and Finance
Volume34
Issue number3
DOIs
StatePublished - Jan 1 2014

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics
  • Public Administration

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