IDEAS home Printed from https://ideas.repec.org/a/kap/itaxpf/v19y2012i4p574-597.html
   My bibliography  Save this article

Games within borders: are geographically differentiated taxes optimal?

Author

Listed:
  • David Agrawal

Abstract

The discontinuous tax treatment of sales at borders creates incentives for individuals to cross-border shop. This paper addresses whether it is optimal for a state composed of multiple regions to levy differentiated commodity tax rates across the regions. In a model where states maximize social welfare, a state’s optimal commodity tax system is almost always geographically differentiated. The optimal pattern of geographic differentiation critically depends on fundamental parameters as well as whether the state has a preference for high or low taxes. Under the assumption that utility is linear in consumption and that the elasticity of cross-border shopping is less than unity in absolute value, high-tax states will find it optimal to set a tax rate that is lower in the border region than in the periphery region and low-tax states will find it optimal to set a tax rate that is higher in the border region than in the periphery region. Optimizing high-tax states will set a higher tax rate in the border region if the social welfare measure is sufficiently redistributive. With welfare maximization, it is possible for taxes to be higher in the region near the state border—an outcome that cannot arise when the government cares only about total tax revenue. Copyright Springer Science+Business Media, LLC 2012

Suggested Citation

  • David Agrawal, 2012. "Games within borders: are geographically differentiated taxes optimal?," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 19(4), pages 574-597, August.
    • Handle: RePEc:kap:itaxpf:v:19:y:2012:i:4:p:574-597
    DOI: 10.1007/s10797-012-9235-y
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1007/s10797-012-9235-y
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1007/s10797-012-9235-y?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Slemrod, Joel & Yitzhaki, Shlomo, 2001. "Integrating Expenditure and Tax Decisions: The Marginal Cost of Funds and the Marginal Benefit of Projects," National Tax Journal, National Tax Association;National Tax Journal, vol. 54(2), pages 189-202, June.
    2. Matthew Harding & Ephraim Leibtag & Michael F. Lovenheim, 2012. "The Heterogeneous Geographic and Socioeconomic Incidence of Cigarette Taxes: Evidence from Nielsen Homescan Data," American Economic Journal: Economic Policy, American Economic Association, vol. 4(4), pages 169-198, November.
    3. Lovenheim, Michael F., 2008. "How Far to the Border?: The Extent and Impact of Cross-Border Casual Cigarette Smuggling," National Tax Journal, National Tax Association;National Tax Journal, vol. 61(1), pages 7-33, March.
    4. Keen, Michael, 2001. "Preferential Regimes Can Make Tax Competition Less Harmful," National Tax Journal, National Tax Association;National Tax Journal, vol. 54(4), pages 757-762, December.
    5. Janeba, Eckhard & Peters, Wolfgang, 1999. "Tax Evasion, Tax Competition and the Gains from Nondiscrimination: The Case of Interest Taxation in Europe," Economic Journal, Royal Economic Society, vol. 109(452), pages 93-101, January.
    6. B. Dahlby & L. S. Wilson, 1994. "Fiscal Capacity, Tax Effort, and Optimal Equalization Grants," Canadian Journal of Economics, Canadian Economics Association, vol. 27(3), pages 657-672, August.
    7. Søren Bo Nielsen, 2001. "A Simple Model of Commodity Taxation and Cross‐border Shopping," Scandinavian Journal of Economics, Wiley Blackwell, vol. 103(4), pages 599-623, December.
    8. David Merriman, 2010. "The Micro-geography of Tax Avoidance: Evidence from Littered Cigarette Packs in Chicago," American Economic Journal: Economic Policy, American Economic Association, vol. 2(2), pages 61-84, May.
    9. Joel Slemrod & Shlomo Yitzhaki, 1996. "The Costs of Taxation and the Marginal Efficiency Cost of Funds," IMF Staff Papers, Palgrave Macmillan, vol. 43(1), pages 172-198, March.
    10. Keen, Michael, 2001. "Preferential Regimes Can Make Tax Competition Less Harmful," National Tax Journal, National Tax Association, vol. 54(n. 4), pages 757-62, December.
    11. Jack Mintz & Henry Tulkens, 2006. "Commodity Tax Competition Between Member States of a Federation: Equilibrium and Efficiency," Springer Books, in: Parkash Chander & Jacques Drèze & C. Knox Lovell & Jack Mintz (ed.), Public goods, environmental externalities and fiscal competition, chapter 0, pages 449-489, Springer.
    12. Joel Slemrod, 2007. "Cheating Ourselves: The Economics of Tax Evasion," Journal of Economic Perspectives, American Economic Association, vol. 21(1), pages 25-48, Winter.
    13. Trandel, Gregory A., 1994. "Interstate commodity tax differentials and the distribution of residents," Journal of Public Economics, Elsevier, vol. 53(3), pages 435-457, March.
    14. Walsh, Michael J. & Jones, Jonathan D., 1988. "More Evidence on the "Border Tax" Effect: The Case of West Virginia, 1979-84," National Tax Journal, National Tax Association, vol. 41(2), pages 261-65, June.
    15. Kanbur, Ravi & Keen, Michael, 1993. "Jeux Sans Frontieres: Tax Competition and Tax Coordination When Countries Differ in Size," American Economic Review, American Economic Association, vol. 83(4), pages 877-892, September.
    16. Tosun Mehmet S & Skidmore Mark L, 2007. "Cross-Border Shopping and the Sales Tax: An Examination of Food Purchases in West Virginia," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 7(1), pages 1-20, December.
    17. Davis, Lucas W., 2011. "The Effects of Preferential Vat Rates Near International Borders: Evidence From Mexico," National Tax Journal, National Tax Association;National Tax Journal, vol. 64(1), pages 85-104, March.
    18. Andreas Haufler, 1996. "Tax coordination with different preferences for public goods: Conflict or harmony of interest?," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 3(1), pages 5-28, January.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Agrawal, David R., 2013. "Over the borderline: How the characteristics of lines shape optimal tax policy," Economics Letters, Elsevier, vol. 119(2), pages 113-116.
    2. Jongmin Shon, 2022. "Tax Competition over Tax Base: An Evidence of Local Sales Tax in California Counties," Hacienda Pública Española / Review of Public Economics, IEF, vol. 241(2), pages 59-77, June.
    3. Mongrain, Steeve & Wilson, John D., 2018. "Tax competition with heterogeneous capital mobility," Journal of Public Economics, Elsevier, vol. 167(C), pages 177-189.
    4. David R. Agrawal, 2015. "The Tax Gradient: Spatial Aspects of Fiscal Competition," American Economic Journal: Economic Policy, American Economic Association, vol. 7(2), pages 1-29, May.
    5. Agrawal, David R., 2016. "Local fiscal competition: An application to sales taxation with multiple federations," Journal of Urban Economics, Elsevier, vol. 91(C), pages 122-138.
    6. Janeba, Eckhard & Todtenhaupt, Maximilian, 2018. "Fiscal competition and public debt," Journal of Public Economics, Elsevier, vol. 168(C), pages 47-61.
    7. Friberg, Richard & Halseth, Emil M. Strøm & Frode, Steen & Ulsaker, Simen A., 2022. "The effect of cross-border shopping on commodity tax revenue: Results from a natural experiment," Discussion Paper Series in Economics 9/2022, Norwegian School of Economics, Department of Economics.
    8. Keaton Miller & Boyoung Seo, 2021. "The Effect of Cannabis Legalization on Substance Demand and Tax Revenues," National Tax Journal, University of Chicago Press, vol. 74(1), pages 107-145.
    9. George E. Halkos & Dimitra C. Kitsou, 2018. "Weighted location differential tax in environmental problems," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 20(1), pages 1-15, January.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Agrawal, David R., 2014. "LOST in America: Evidence on local sales taxes from national panel data," Regional Science and Urban Economics, Elsevier, vol. 49(C), pages 147-163.
    2. Andrés Leal & Julio López-Laborda & Fernando Rodrigo, 2010. "Cross-Border Shopping: A Survey," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 16(2), pages 135-148, May.
    3. Agrawal, David R. & Trandel, Gregory A., 2019. "Dynamics of policy adoption with state dependence," Regional Science and Urban Economics, Elsevier, vol. 79(C).
    4. Leal, Andrés & López-Laborda, Julio & Rodrigo, Fernando, 2009. "Prices, taxes and automotive fuel cross-border shopping," Energy Economics, Elsevier, vol. 31(2), pages 225-234.
    5. Agrawal, David R. & Mardan, Mohammed, 2019. "Will destination-based taxes be fully exploited when available? An application to the U.S. commodity tax system," Journal of Public Economics, Elsevier, vol. 169(C), pages 128-143.
    6. Agrawal, David R., 2016. "Local fiscal competition: An application to sales taxation with multiple federations," Journal of Urban Economics, Elsevier, vol. 91(C), pages 122-138.
    7. Ghoddusi, Hamed & Rafizadeh, Nima & Rahmati, Mohammad H., 2018. "Price elasticity of gasoline smuggling: A semi-structural estimation approach," Energy Economics, Elsevier, vol. 71(C), pages 171-185.
    8. Hansen, Benjamin & Miller, Keaton & Weber, Caroline, 2020. "Federalism, partial prohibition, and cross-border sales: Evidence from recreational marijuana," Journal of Public Economics, Elsevier, vol. 187(C).
    9. Mongrain, Steeve & Wilson, John D., 2018. "Tax competition with heterogeneous capital mobility," Journal of Public Economics, Elsevier, vol. 167(C), pages 177-189.
    10. repec:kap:iaecre:v:16:y:2010:i:2:p:135-148 is not listed on IDEAS
    11. David R. Agrawal, 2015. "The Tax Gradient: Spatial Aspects of Fiscal Competition," American Economic Journal: Economic Policy, American Economic Association, vol. 7(2), pages 1-29, May.
    12. Jan Jacobs & Jenny Ligthart & Hendrik Vrijburg, 2010. "Consumption tax competition among governments: Evidence from the United States," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 17(3), pages 271-294, June.
    13. Lockwood, Ben, 2001. "Tax competition and tax co-ordination under destination and origin principles: a synthesis," Journal of Public Economics, Elsevier, vol. 81(2), pages 279-319, August.
    14. Rossitza B. Wooster & Joshua W. Lehner, 2010. "Reexamining The Border Tax Effect: A Case Study Of Washington State," Contemporary Economic Policy, Western Economic Association International, vol. 28(4), pages 511-523, October.
    15. Aiura, Hiroshi & Ogawa, Hikaru, 2013. "Unit tax versus ad valorem tax: A tax competition model with cross-border shopping," Journal of Public Economics, Elsevier, vol. 105(C), pages 30-38.
    16. Kojun Hamada, 2022. "Commodity tax competition and cross-border shopping in a tripoint model," Asia-Pacific Journal of Regional Science, Springer, vol. 6(2), pages 837-862, June.
    17. Richard Friberg & Frode Steen & Simen A. Ulsaker, 2022. "Hump-Shaped Cross-Price Effects and the Extensive Margin in Cross-Border Shopping," American Economic Journal: Microeconomics, American Economic Association, vol. 14(2), pages 408-438, May.
    18. Melissa Gentry & Nadia Greenhalgh-Stanley & Shawn M. Rohlin & Jeffrey P. Thompson, 2020. "Dynamic Sales Tax Competition: Evidence from Panel Data at the Border," Working Papers 20-5, Federal Reserve Bank of Boston.
    19. Vander LUCAS, 2001. "Cross-Border Shopping in a Federalist Economy," LIDAM Discussion Papers IRES 2002018, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES), revised 28 May 2002.
    20. Saša Ranđelović & Milica Bisić, 2021. "Excise duties harmonisation and smoking in a model with cross-border arbitrage," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 48(2), pages 507-532, May.
    21. Asplund, Marcus & Friberg, Richard & Wilander, Fredrik, 2007. "Demand and distance: Evidence on cross-border shopping," Journal of Public Economics, Elsevier, vol. 91(1-2), pages 141-157, February.

    More about this item

    Keywords

    Commodity taxation; Cross-border shopping; Tax competition; Preferential tax rates; H21; H25; H73; H77; R12;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:itaxpf:v:19:y:2012:i:4:p:574-597. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.