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Finance and Economics Discussion Series
The Finance and Economics Discussion Series logo links to FEDS home page The Effects of Interest Rates and Taxes on New Car Prices
Maura P. Doyle

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: Sales taxes, car prices, interest rates

Full paper (305 KB PDF) | Full paper (297 KB Postscript)

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Last update: September 17, 1997