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Gasoline taxes can be employed to correct externalities associated with automobile use, to reduce dependency on foreign oil, and to raise government revenue. Our understanding of the optimal gasoline tax and the efficacy of existing taxes is largely based on empirical analysis of consumer responses to gasoline price changes. In this paper, we directly examine how gasoline taxes affect consumer behavior as distinct from tax-exclusive gasoline prices. Our analysis shows that a 5-cent tax increase reduces gasoline consumption by 1.3 percent in the short-run, much larger than that from a 5-cent increase in the tax-exclusive gasoline price. This difference suggests that traditional analysis could significantly underestimate policy impacts of tax changes. We further investigate the differential effect from gasoline taxes and tax-exclusive gasoline prices on both the intensive and extensive margins of gasoline consumption. We discuss implications of our findings for the estimation of the implicit discount rate for vehicle purchases and for the fiscal benefits of raising taxes.

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In simple models of taxation, the incidence of a tax is independent of the side of the market which is responsible for remitting the tax to the government. However, this prediction does not survive when the ability to evade taxes differs across economic agents. In this paper, we estimate in the context of state diesel fuel taxes how the incidence of a quantity tax depends on the point of tax collection, where the level of the supply chain responsible for remitting the tax varies across states and over time. Our results reject the proposition that the point of collection is irrelevant to incidence -moving the point of tax collection from the retail station to higher in the supply chain substantially raises the pass-through of diesel taxes to the retail price. Furthermore, tax revenues respond positively to collecting taxes from the distributor or prime supplier rather than from the retailer, suggesting that evasion is the likely explanation for the incidence result. JEL: H22, H26, H71 Keywords: tax incidence, evasion, diesel fuelThe independence between statutory and economic incidence of a tax is a wellknown and widely accepted result in the theory of taxation. The textbook presentation of the theory of tax incidence holds that the party responsible for remitting the tax to the government has no impact on who actually bears the burden, at least in the long run. Despite its prominent treatment, this result holds only under special circumstances. The primary contribution of this paper is to illustrate a new way in which the independence of economic incidence from the remittance regime may break down. If parties differ in their ability to evade taxes, the identity of the tax remitter may impact the pattern of post-tax prices and therefore the location of their burden. Due to different evasion technologies available to the different sides of a market, a tax levied on the demand side may shift the demand curve to a different degree than a similar tax levied on supply side would shift the supply curve.

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