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

Donald Dutkowsky () and Ryan S. Sullivan

Applied Economics Letters, 2017, vol. 24, issue 2, 113-116

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.

Date: 2017
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DOI: 10.1080/13504851.2016.1167821

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