Working Paper: NBER ID: w28838
Authors: Kory Kroft; Jean-William P. Laliberté; Ren Leal-Vizcaíno; Matthew J. Notowidigdo
Abstract: This paper develops a theory of commodity taxation with love-of-variety preferences and endogenous firm entry and exit. We consider a framework that encompasses a wide range of firm conduct and derive formulas for efficiency and pass-through of specific and ad valorem taxes. These formulas unify existing canonical ones in the literature and lead to novel economic insights for both welfare and incidence. We use them to derive a desirability condition for when ad valorem taxation is more efficient than specific taxation and a condition for when ad valorem taxation leads to greater pass-through than specific taxation. Finally, we consider an empirical application that illustrates how to estimate the key parameters of the tax formulas in a theoretically consistent way. Our results indicate that specific taxes are more efficient at the margin than ad valorem taxes and that product variety is below the socially optimal level.
Keywords: commodity taxation; free entry; love-of-variety preferences; efficiency; incidence
JEL Codes: H20; H22; H71
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| specific taxes (H29) | higher passthrough in the long run (H22) |
| endogenous firm entry (L26) | higher passthrough of specific taxes (H29) |
| ad valorem taxes (H25) | reduce firm entry (L11) |
| ad valorem taxes (H25) | larger marginal excess burden (D62) |
| specific taxes (H29) | preferable from a welfare perspective (D69) |
| taxation (H20) | product variety effect (L15) |
| reduction in product variety (L15) | negative consumption externalities (D62) |
| sales taxes (H71) | overshift onto consumer prices (P22) |
| sales taxes (H71) | impact on market demand (F61) |
| sales taxes (H71) | reduce product variety (L15) |
| conduct parameter (L91) | high competition among firms (L13) |
| variety effect (L15) | substantial willingness to pay for product variety (D11) |
| privately optimal product variety (D43) | insufficient compared to socially optimal level (H49) |