Salience and Taxation with Imperfect Competition

Abstract

This paper studies commodity taxation in a model featuring heterogeneous consumers, imperfect competition, and tax salience. We derive new formulas for the incidence and marginal excess burden of commodity taxation, and we find that tax salience and market structure interact when considering tax incidence and the marginal excess burden. We estimate the necessary inputs to the formulas by combining Nielsen Retail Scanner data from grocery stores in the US with detailed sales tax data. We calibrate our new formulas and conclude that essentially all of the incidence of sales taxes falls on consumers, and the marginal excess burden of taxation is larger than estimates based on standard formulas that ignore imperfect competition and tax salience.

Keywords: tax salience, imperfect competition, sales taxes, scanner data

JEL Classification: D12, H2, H25, H71