Overreaction to Excise Taxes: The Case of Gasoline

Abstract

In this paper we contribute new results on the different consumers' reaction to tax or price changes. We separately compute the compensated gasoline retail price elasticity and the gasoline tax elasticity and show that consumers overreact to taxes as compared to price variations. A novel element in our analysis is that we compare reactions to tax-inclusive retail prices to reactions to information on excise taxes that is made available to consumers. We estimate a complete system of demand for the U.S. population of households using quarterly data from the Consumer Expenditure Survey from 2007 to 2009. Relying on a complete system of demands rather than on single equations avoids imposing an implausible separability restriction, thus allowing estimation of accurate elasticities that take behavioral responses into account, i.e. that account for the way in which consumers reallocate their expenditure on a bundle of goods after a price/tax change in one of the goods. Our analysis shows that the reaction to a gasoline tax change is, on average, about 20% stronger than the reaction to a corresponding price change. We discuss the implications of our findings for the design of energy policies.

Anticipation, Tax Avoidance, and the Price Elasticity of Gasoline Demand

“…This argument is in line with Chetty et al's (2009) evidence that increasing consumers' awareness of sales taxes affects consumer demand. Third, as noted by Tiezzi and Verde (2014), consumers may suffer from tax aversion (see McCaffery and Baron 2006). These three explanations are not mutually exclusive.…”

“…These three explanations are not mutually exclusive. In response to the evidence in Davis and Kilian (2011), several studies have compared the price elasticity of gasoline demand with the tax elasticity of gasoline demand (see Li et al 2014;Tiezzi and Verde 2014;Rivers and Schaufele 2014).…”

Anticipation, Tax Avoidance, and the Price Elasticity of Gasoline Demand

“…For example, Li et al (2014) find much larger responses to changes in gasoline taxes than to changes in gasoline prices, and Tiezzi and Verde (2014) find that the elasticity of demand with respect to a change the gasoline tax is about 20% higher than the elasticity of demand with respect to prices.…”

“…These three explanations are not mutually exclusive. In response to the evidence in Davis and Kilian (2011), several studies have compared the price elasticity of gasoline demand with the tax elasticity of gasoline demand (see Li et al 2014;Tiezzi and Verde 2014;Rivers and Schaufele 2014).…”

“…The reviews by Dahl and Sterner (1991), Espey (1998), Greene et al (1999), Graham and Glaister (2004) and Brons et al (2008) identify dozens of econometric studies of this elasticity. More recent contributions include Hughes et al (2008), Li et al (2014), Levin, Lewis and Wolak (2014), and Tiezzi and Verde (2014).…”