Working Paper

The effects of interest rates and taxes on new car prices

Abstract: Utilizing the Consumer Expenditure Survey and state-level variation in taxes, this study finds that prices for most models of new cars shift by more than the amount of a sales tax. The evidence of an overshifting of prices offers support for the recent models of tax incidence in imperfectly competitive markets. The results also suggest that changes in the after-tax interest rate have offsetting effects on new car prices; a one percentage point increase in the after-tax real interest rate will prompt, on average, a mark-down of $106.

Keywords: Taxation; Automobile industry and trade; Interest rates; Prices;

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 1997

Number: 1997-38