Ad-valorem tax incidence and after-tax price adjustments: evidence from Brazilian basic basket food

Ad-valorem tax incidence and after-tax price adjustments: evidence from Brazilian basic basket food

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Article ID: iaor201111987
Volume: 44
Issue: 4
Start Page Number: 1438
End Page Number: 1470
Publication Date: Nov 2011
Journal: Canadian Journal of Economics/Revue canadienne d'conomique
Authors: ,
Keywords: agriculture & food
Abstract:

Recent empirical work on tax incidence suggests that after‐tax price responses are independent of the tax change direction. This paper investigates asymmetric price responses to ad‐valorem tax changes in the Brazilian food market for 10 goods in 16 states during the period 1994–2008. Our results suggest that when tax rates increase, tax full shifting occurs for 2 of the 10 goods and tax overshifting occurs for one of the 10 goods; the price response to tax cuts is an undershifting for all goods. Moreover, this last result is similar to our estimation of (average) tax incidence (undershifting). We also investigate the short‐term and long‐term relationships between prices and VAT rate parameters and find that prices seem to respond to tax shocks within four months.

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