Heterogeneous Tax-Cut Pass-Through and Market Structure

Abstract

This paper estimates the effects of a motor fuel tax cut on retail prices and examines the role of market competition intensity in determining the pass-through rate. By employing a matched difference-in-differences strategy that uses nationwide panel data at the gas station level, I investigate how the magnitude of price reduction in response to the temporary tax reform in South Korea varies across local market structures. The results indicate a positive association between pass-through rates and the intensity of competition, with incomplete pass-through observed predominantly among firms that face fewer rivals. These findings offer an explanation for the incomplete tax-cut effects that are observed in energy and other consumption taxes and suggest that tax-reduction programs can benefit firms with local market power by increasing their profits, which thereby decreases the efficacy of fiscal policies that are aimed at reducing prices.