Excise taxes, over-shifting, cross-elasticity, and tax revenue

Donald H Dutkowsky, Ryan S. Sullivan

Research output: Contribution to journalArticle

3 Scopus citations

Abstract

This article examines cross-elasticity effects in excise taxation for markets characterized by monopolistic competition and over-shifting. Extending the constant elasticity demand model to consider cross-elasticity leads to notably different results regarding tax revenue maximization. With nonzero but weak cross-elasticity effects relative to the price elasticity, we derive a higher optimal tax-price ratio compared to prior research. With strong cross-elasticity, revenue can continually be increased by raising the excise tax. Overall, the study offers government greater incentive to use excise taxes to obtain revenue.

Original languageEnglish (US)
Pages (from-to)1-4
Number of pages4
JournalApplied Economics Letters
DOIs
StateAccepted/In press - Apr 23 2016

Keywords

  • cross-elasticity
  • excise tax
  • over-shifting
  • Tax incidence
  • tax revenue

ASJC Scopus subject areas

  • Economics and Econometrics

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