The Bank of Israel published today (Sunday) a study on the effect of the taxation of disposable instruments on their prices. Usually a tax increase is divided between the producers and the consumers, but here – not only was the tax passed on in full to the consumers, but the prices rose above and beyond the tax. While the tax increased the prices of disposable plastic products by NIS 13 per kg (of which NIS 2 per kg plus VAT), prices actually increased by NIS 22 per kg.
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According to the Bank of Israel, “the actual increase in the price above and beyond the tax liability supports the possibility that the market does not operate in perfect competition because of the structure of the supply side of the market or because the information available to consumers is incomplete.” That is, there is an unusual behavior of the market here, which is not characteristic of a sophisticated “classical” market.
Where is the gap? According to the Bank of Israel, there is almost no difference between different brands of disposable utensils, which indicates that in the eyes of consumers there are no fundamental differences between the different brands. But on the other hand, the differences between the different chains are very large: even when you subtract the two most extreme observations, you get a gap of up to NIS 15 per kg between different chains. That is, the tax is rolled out at very different rates between the chains, and consumers have not yet learned where the increase in price is really only due to the tax – and who took advantage of the tax to bring about an additional increase in price.
without differences between secular and ultra-Orthodox
The division between the networks is not related to whether or not a certain network is aimed at the ultra-orthodox sector, and this variable in the Bank of Israel’s examination showed relatively weak statistical significance. The same goes for belonging to large chains, the size of the population in the locality and the average salary there. The Bank of Israel recognized the great variation between the networks, but was unable to establish the source of the differences between them in any of the parameters it chose to check.
According to the Bank of Israel, “an excess increase in the price after the imposition of similar taxes is a well-known phenomenon in the world. In the current case, it seems that the consumer’s difficulty in identifying the increase derived from the tax – a difficulty arising from the fact that the tax is determined on the basis of weight, which is difficult for the consumer to estimate – made it easier The excessive increase in the price. It is possible that the increase in the prices of raw materials in the world and the acceleration in the rate of inflation recorded at the time also facilitated the increase in prices.”
In other words, the Bank of Israel speculates that prices in the world have become more expensive anyway, and the chains have “charged” inflation that would have occurred anyway – precisely on the day of the tax increase. This is to place the blame for the increase in prices on the tax, and not on the decision of the specific chain – even though it was exactly a decision of a specific chain based on additional considerations beyond the tax. However, it is worth noting that other plastic products that were not taxed, such as cling film and a package of garbage bags, were not affected at all by the imposition of the new tax.
These results have interesting implications for tax policy and how it should be done. On the one hand, the excess price increase may actually be perceived as a positive result – after all, the goal of the tax from the beginning was to make the products more expensive in order to reduce their consumption, so an excess increase can also be interpreted as an over and above success of the policy. On the other hand, the Bank of Israel did not include in the study questions about the amount of consumption, so it is not known whether the price increase achieved its goal.
However, the price increase also burdens households and presents the tax as much heavier than it really is. The Bank of Israel speculates that one of the reasons for this is the way in which the tax was imposed – as absolute shekels per kg of plastic, which is supposed to represent the pollution, and not as a percentage of the price. According to the Bank of Israel, “determining the tax as a percentage of the price to the consumer would have made it easier for consumers to compare it and The actual price increase. However, it may harm the appropriateness of the tax for its purpose (reducing the amount of plastic for environmental reasons), because the relationship between the amount of the tax and the weight of the plastic in the product is less tight.”
Therefore, the Bank of Israel offers a solution designed to raise consumer awareness of the true amount of the tax: to prominently indicate on each package its weight – and consequently the tax imposed on it. In this way, consumers will be able to link the price increase with the tax, and distinguish between a price increase that results from it and a price increase that results from the chain’s choice to make the product more expensive on that occasion.