Tax incidence in a vertical supply chain: Evidence from cigarette wholesale prices

I investigate how the burden of consumption taxes not borne by consumers is shared between upstream firms that produce a taxed good and downstream firms that sell the goods. Using novel data on monthly brand-level cigarette wholesale prices and retail prices from Nielsen Homescan data, I find that taxes are passed through to wholesale and retail prices at rates of 0.80 and 0.72. The results suggest that downstream firms selling cigarettes bear no more than one-third of the firm share of the tax burden.