National Price Levels: Do Taxes Matter?

Utilizing a sample of 51 countries for which price level data for 1980 were available from stage IV of the ICP project, the paper examines the possible role of taxes in explaining the departure of national price levels from purchasing power parities. The results obtained in the paper suggest that the overall burden of central government taxation, especially of indirect domestic taxes, raises the general price level. No such price effects seem to be associated with the direct tax burden, supporting the conventional view of their not being shifted forward. The perhaps unexpected result, that import duties have no discernible effects on the price level, is consistent with earlier findings. Another unexpected result is that the burden of domestic indirect taxation expresses itself in the prices of tradables, rather than of non-tradables. Furthermore, no evidence was found to support the view, that tax inflated prices are offset by reduced prices in the untaxed sector, as required for the price level to be neutral with respect to taxation.