Exxon pays roughly $40B in tax each year. According to standard economic theory, they don't really pay that tax, much of it is borne by the consumer in the form of higher gas prices. How much the consumer pays depends on the relative ability of consumers and producers to react to higher prices. Since it is widely agreed that consumers are less responsive to gas prices than producers, it is widely agreed that consumers pay the majority of Exxon's tax bill. But do they?
I spent much of the morning trying to figure out an answer. I have 10 pages of algebra and calculus sitting in front of me. Stuff that should be obvious, but wasn't to me*. When I finally reached a point where I thought I had a working model, I needed to go to Google to find estimates of the elasticiy of demand and supply for gasoline. That's when I came across this**:
Using a simple competitive model of tax incidence, we formulated two hypotheses: that the consumer incidence of a state specific gasoline tax would exceed that of a federal tax, and that the state consumer incidence would fall with the share of national gasoline sales in a state. These predictions were based on the result that the residual supply elasticity is greater for state than for federal taxes and greater for small than for large states.
These predictions are confirmed by our empirical study. The consumer incidence is a half for the federal tax but nearly one for the average size state. The consumer incidence is much smaller in the larger states than in smaller ones.
A couple of lessons:
- Nationally consumers are more reactive to price changes than locally, at least relative to the ability of producers to react to the same price changes. At the risk of grossly misapplying the results, that means roughly half of Exxon's federal tax bill is paid by consumers. I would have thought it was higher.
- Googling first would have saved me a lot of time.
*For anyone interested, I was able to derive the tax incidence equation from scratch without reference to any textbook or the internet tubes. I'm proud of myself--even if the result has been around for 40 years.
**"Incidence of federal and state gasoline taxes," Hayley Chouinard and Jeffrey M. Perloff, Economics Letters, 2004.
