Vehicle Registration Tax (VRT) is an ad-valorem tax charged on the registration of all new cars in Ireland, which is differentiated according to the engine size of a car or CO2 emissions. Accounting for differentiated taxation we tailor a simple theoretical model to unravel the interaction between the taxation system and asymmetries in product quality and cost efficiency within an oligopolistic market. We study the pass-on of taxation on producers and consumers. Using a panel dataset on new cars sold in Ireland for the period 2004-2008 and a structural model, we test our predictions relying on the estimated primitives of demand and pricing. Then, a counterfactual simulation where homogeneous taxation is imposed, is employed to numerically assess the distortion on the incidence of taxation caused by the differentiated taxation, and highlight the mechanism of possible tax over-shifting.

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