Tax thy neighbour: local corporate taxes and consumer prices across German regions

Luca Dedola, Chiara Osbat and Timo Reinelt

Research Bulletin, 2022, vol. 95

Abstract: To what extent are corporate taxes passed on to consumers? And more generally, how do wholesaleproducers affect retail prices? Using data from Germany, where individual municipalities set local corporate taxrates, we shed new light on these questions. To estimate the impact of changes in producers’ tax rates onconsumer prices, we link 1,058 tax changes between 2013 and 2017 to changes in the retail prices of morethan 125,000 food and personal care products sold across Germany. A one percentage point increase in thelocal corporate tax leads on average to a 0.4% increase in the retail price of goods “exported” by the taxedfirms to stores in the rest of Germany. While neither the size of producers nor their market shares seem toaffect the strength of this pass-through, the type of store selling the product does: supermarkets andhypermarkets account for most of the increase in prices. Our findings suggest the following policy-relevantimplications: i) producers use their market power to shield profits from corporate taxes; ii) some retailers passon a large share of wholesale price changes; iii) the low-inflation period from 2013 to 2017 did not impair thepass-through of shocks to consumer prices. JEL Classification: F12, F45, E13, H71, L11

Keywords: corporate taxes; imperfect competition; producer pass-through to retail prices; vertical interactions (search for similar items in EconPapers)
Date: 2022-05
Note: 80922
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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