Engel curves on outsourcing and foreign environmental taxes: A valued‐added approach

Abstract

This paper estimates Engel curves on the foreign content (outsourcing) and the foreign environmental taxes embedded in the consumption of final goods and services in the United States (U.S.). We estimate Engel curves using U.S. household income and consumption information from 1996 to 2011 and find that they are concave and shift down over time. Importantly, our results suggest a coherent picture where the foreign content and the foreign environmental taxes in U.S. household consumption bundles decreased on average over time primarily because of a composition effect where the significant income increase has led to a shift in consumption towards goods and services with lower foreign content and lower foreign environmental taxes. Both effects represent a movement along their respective Engel curves. Consequently, other effects besides income changes play a minor role in the evolution of consumer decisions and their relationship with foreign content and environmental taxes.