Excise Taxation and Product Quality: The Gasoline Market

Abstract

Following Barzel (1976), product quality increases in response to unit taxation but remains unchanged by ad valorem taxation. While many tax theorists agree this argument is theoretically sound, empirical support of Barzel's theory is limited to the cigarette market. This paper tests and confirms his theory in the gasoline market, a market in which Barzel failed to find supporting evidence in his original article. Using a direct test and improved data, the estimates suggest that the market share of premium-grade gasoline increases in response to both unit taxation and ad valorem taxation.