Market Power and the Heterogeneous Pass-through of Corporate Taxes to Consumer Prices

We study the pass-through of corporate taxes into consumer prices, leveraging 1,058 municipal tax rate changes affecting 4,754 German firms. A 1 p.p. increase in a producer's tax rate raises retail prices by 0.3% on average, consistent with imperfectly competitive producers. Product-level pass-through varies substantially, as it increases in destination-specific product and retailer-category market shares. We find little evidence linking heterogeneous passthrough to differences in retailer efficiency as reflected in relative consumer prices. Instead, our findings align with standard non-CES preferences where pass through increasing with market shares implies weaker strategic complementarities in price setting than when this relationship is reversed.

Suggested citation:

Dedola, Luca, Chiara Osbat, and Timo Reinelt. 2025. "Market Power and the Heterogeneous Pass-through of Corporate Taxes to Consumer Prices." Federal Reserve Bank of San Francisco Working Paper 2025-25. https://doi.org/10.24148/wp2025-25