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

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  • Donald H. Dutkowsky
  • Ryan S. Sullivan

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.

Suggested Citation

  • Donald H. Dutkowsky & Ryan S. Sullivan, 2017. "Excise taxes, over-shifting, cross-elasticity, and tax revenue," Applied Economics Letters, Taylor & Francis Journals, vol. 24(2), pages 113-116, January.
    • Handle: RePEc:taf:apeclt:v:24:y:2017:i:2:p:113-116
    DOI: 10.1080/13504851.2016.1167821
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    Cited by:

    1. Bryan Bollinger & Steven E. Sexton, 2023. "Local excise taxes, sticky prices, and spillovers: evidence from Berkeley’s soda tax," Quantitative Marketing and Economics (QME), Springer, vol. 21(2), pages 281-331, June.
    2. Ce Shang & Anh Ngo & Frank J. Chaloupka, 2020. "The pass-through of alcohol excise taxes to prices in OECD countries," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 21(6), pages 855-867, August.

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