Differentiated taxation in imperfectly çompetitive markets: Evidence from the irish automobile market

Abstract

Vehicle Registration Tax (VRT) is an ad-valorem tax charged on the registration of all new cars in Ireland, which is differentiated according to the engine size of a car and CO2 emissions. Accounting for this type of taxation we develop a simple theoretical model looking at the interaction of the taxation system with the product quality and cost efficiency in an oligopolistic market. We study its incidence on producers and consumers. Using a panel dataset on new cars sold in Ireland for the period 2004-2008, we test our predictions relying on the estimated primitives of demand and pricing. Then, a counterfactual simulation is used to numerically assess the impact of differentiated versus homogeneous ad-valorem taxation and the possibility of tax over-shifting. We show how the asymmetries relate to the two alternative types of ad-valorem of taxation.