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Sensitivity versus size: implications for tax competition

Author

Listed:
  • Agrawal, David R.

    (Department of Economics, University of California, Irvine)

  • Bagh, Adib

    (Departments of Economics and Mathematics, University of Kentucky)

  • Mardan, Mohammed

    (Department of Business and Management Science, Norwegian School of Economics (NHH))

Abstract

The conventional wisdom is that a big jurisdiction sets a higher tax rate than a small jurisdiction. We show this result arises due to simplifying assumptions that imply tax-base sensitivities are equal across jurisdictions. When more than two jurisdictions compete in commodity taxes, tax-base sensitivities need not be equal across jurisdictions and a small jurisdiction can set a higher tax rate than a big jurisdiction. Our analysis extends to capital and profit taxes, and, more generally, to various types of multi-player asymmetric competition.

Suggested Citation

  • Agrawal, David R. & Bagh, Adib & Mardan, Mohammed, 0. "Sensitivity versus size: implications for tax competition," Theoretical Economics, Econometric Society.
    • Handle: RePEc:the:publsh:5338
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    More about this item

    Keywords

    Ramsey rule; inverse elasticity; fiscal competition; optimal taxation; spatial price competition; sales tax;
    All these keywords.

    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H7 - Public Economics - - State and Local Government; Intergovernmental Relations
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • R5 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis

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