The E ects of Interest Rates and Taxes on New Car Prices

Utilizing the Consumer Expenditure Survey and state-level variation in taxes, this study nds 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 o ers 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 o setting e ects 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. The views in this paper do not necessarily re ect those of the Board of Governors of the Federal Reserve System or its sta . I am grateful to Doug Elmendorf, Steve She rin, and Chris Snyder for helpful comments, to Upacala Mapatuna and Alak Goswami for excellent research assistance, to Bill Passero for assistance with the Consumer Expenditure Survey, to Joe Beaulieu for providing me with data on suggested retail prices and to Dan Feenberg for assistance with TAXSIM. I retain all responsibility for errors.