TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Friday, August 25, 2017

Rozema: Tax Incidence In A Vertical Supply Chain — Evidence From Cigarette Wholesale Prices

Kyle Rozema (Chicago), Tax Incidence in a Vertical Supply Chain: Evidence from Cigarette Wholesale Prices:

I investigate how the burden of consumption taxes not borne by consumers is shared between upstream firms that produce a taxed good and downstream firms that sell the goods. First, I study a simple theoretical model of tax incidence in a vertical supply chain and show that the tax pass through rates to wholesale prices, consumer prices, and posted retail prices serve as a sufficient statistic for the split of the firm share of the tax burden. Second, I use novel data on monthly brand-level cigarette wholesale prices in six states to estimate the tax pass through rate to wholesale prices, and estimate the tax pass through rates to consumer and posted retail prices from Nielsen Homescan Data.

The estimates and the derived incidence formulas suggest that downstream firms that sell cigarettes bear no more than one-third of the firm share of the tax burden.

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