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Sensitivity Versus Size: Implications for Tax Competition

Author

Listed:
  • David R. Agrawal
  • Adib Bagh
  • Mohammed Mardan

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

  • David R. Agrawal & Adib Bagh & Mohammed Mardan, 2025. "Sensitivity Versus Size: Implications for Tax Competition," CESifo Working Paper Series 11616, CESifo.
    • Handle: RePEc:ces:ceswps:_11616
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    File URL: https://www.cesifo.org/DocDL/cesifo1_wp11616.pdf
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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:

    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H70 - Public Economics - - State and Local Government; Intergovernmental Relations - - - General
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • R50 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - General

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