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Job market paper

Taxation of Multi-Product Firms with Cost Complementarities

I analyze how taxes impact prices, quantities, and welfare when products are connected via demand or cost relationships. Exploiting spatial and temporal variation in taxes from 1993 to 2015, I estimate a discrete-choice, oligopoly model of the U.S. domestic aviation industry, a network setting where demand-side substitutes are straightforward to observe and cost complementarities arise naturally. I show that cost complementarities increase incidence on taxed products and cause incidence to spill over across a firm's products. Taxation of hub airports generate larger spill-over effects and greater negative effects on consumer welfare. Counterfactual simulations of revenue-neutral tax policies show standardizing taxes across routes slightly increases consumer welfare while subsidizing hubs increases consumer welfare marginally. I discuss heterogeneity in welfare changes across markets and product type as well as how substitutable products and cost complementarities can minimize tax distortions.


14, 21, 3

Other papers

Taxation in the Aviation Industry: Insights and Challenges David R. Agrawal, Jonathan W. Williams

Taxation in Networks: Evidence from the Airline Industry David R. Agrawal, Jonathan W. Williams