IDEAS home Printed from https://ideas.repec.org/p/ces/ceswps/_11616.html
   My bibliography  Save this paper

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
    as

    Download full text from publisher

    File URL: https://www.cesifo.org/DocDL/cesifo1_wp11616.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Bloch, Francis & Manceau, Delphine, 1999. "Persuasive advertising in Hotelling's model of product differentiation," International Journal of Industrial Organization, Elsevier, vol. 17(4), pages 557-574, May.
    2. 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.
    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. Huizinga, Harry & Laeven, Luc & Nicodeme, Gaetan, 2008. "Capital structure and international debt shifting," Journal of Financial Economics, Elsevier, vol. 88(1), pages 80-118, April.
    5. Wilson, John Douglas, 1991. "Tax competition with interregional differences in factor endowments," Regional Science and Urban Economics, Elsevier, vol. 21(3), pages 423-451, November.
    6. 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.
    7. Neven, Damien J., 1986. "On Hotelling's competition with non-uniform customer distributions," Economics Letters, Elsevier, vol. 21(2), pages 121-126.
    8. Haufler, Andreas & Wooton, Ian, 1999. "Country size and tax competition for foreign direct investment," Journal of Public Economics, Elsevier, vol. 71(1), pages 121-139, January.
    9. Mark Bagnoli & Ted Bergstrom, 2006. "Log-concave probability and its applications," Studies in Economic Theory, in: Charalambos D. Aliprantis & Rosa L. Matzkin & Daniel L. McFadden & James C. Moore & Nicholas C. Yann (ed.), Rationality and Equilibrium, pages 217-241, Springer.
    10. Wittman, Donald, 1983. "Candidate Motivation: A Synthesis of Alternative Theories," American Political Science Review, Cambridge University Press, vol. 77(1), pages 142-157, March.
    11. Ushchev, Philip & Zenou, Yves, 2018. "Price competition in product variety networks," Games and Economic Behavior, Elsevier, vol. 110(C), pages 226-247.
    12. Slemrod, Joel & Kopczuk, Wojciech, 2002. "The optimal elasticity of taxable income," Journal of Public Economics, Elsevier, vol. 84(1), pages 91-112, April.
    13. Caplin, Andrew & Nalebuff, Barry, 1991. "Aggregation and Imperfect Competition: On the Existence of Equilibrium," Econometrica, Econometric Society, vol. 59(1), pages 25-59, January.
    14. 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.
    15. Joel Slemrod, 2019. "Tax Compliance and Enforcement," Journal of Economic Literature, American Economic Association, vol. 57(4), pages 904-954, December.
    16. Bucovetsky, S., 1991. "Asymmetric tax competition," Journal of Urban Economics, Elsevier, vol. 30(2), pages 167-181, September.
    17. Mossay, P. & Picard, P.M., 2011. "On spatial equilibria in a social interaction model," Journal of Economic Theory, Elsevier, vol. 146(6), pages 2455-2477.
    18. Devereux, M.P. & Lockwood, B. & Redoano, M., 2007. "Horizontal and vertical indirect tax competition: Theory and some evidence from the USA," Journal of Public Economics, Elsevier, vol. 91(3-4), pages 451-479, April.
    19. Antoni Calvó‐Armengol & Yves Zenou, 2002. "The Importance of the Distribution of Consumers in Horizontal Product Differentiation," Journal of Regional Science, Wiley Blackwell, vol. 42(4), pages 793-803.
    20. 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.
    21. Hebous, Shafik & Keen, Michael, 2023. "Pareto-improving minimum corporate taxation," Journal of Public Economics, Elsevier, vol. 225(C).
    22. Anderson, Simon P & de Palma, Andre & Nesterov, Yurii, 1995. "Oligopolistic Competition and the Optimal Provision of Products," Econometrica, Econometric Society, vol. 63(6), pages 1281-1301, November.
    23. Keen, Michael & Slemrod, Joel, 2017. "Optimal tax administration," Journal of Public Economics, Elsevier, vol. 152(C), pages 133-142.
    24. Bloch, Francis & Quérou, Nicolas, 2013. "Pricing in social networks," Games and Economic Behavior, Elsevier, vol. 80(C), pages 243-261.
    25. Lockwood, Ben, 1993. "Commodity tax competition under destination and origin principles," Journal of Public Economics, Elsevier, vol. 52(2), pages 141-162, September.
    26. Yoshiaki Ohsawa & Takeshi Koshizuka, 2003. "Two-dimensional fiscal competition," Journal of Economic Geography, Oxford University Press, vol. 3(3), pages 275-287, July.
    27. Tarbush, Bassel, 2018. "Hotelling competition and the gamma distribution," Games and Economic Behavior, Elsevier, vol. 111(C), pages 222-240.
    28. Yongmin Chen & Michael H. Riordan, 2007. "Price and Variety in the Spokes Model," Economic Journal, Royal Economic Society, vol. 117(522), pages 897-921, July.
    29. You-Qiang Wang, 1999. "Commodity Taxes under Fiscal Competition: Stackelberg Equilibrium and Optimality," American Economic Review, American Economic Association, vol. 89(4), pages 974-981, September.
    30. Clemens Fuest & Samina Sultan, 2019. "How Will Brexit Affect Tax Competition and Tax Harmonization? The Role of Discriminatory Taxation," National Tax Journal, National Tax Association;National Tax Journal, vol. 72(1), pages 111-138, March.
    31. Rota-Graziosi, Grégoire, 2019. "The supermodularity of the tax competition game," Journal of Mathematical Economics, Elsevier, vol. 83(C), pages 25-35.
    32. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
    33. 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.
    34. Trandel, Gregory A., 1992. "Evading the use tax on cross-border sales : Pricing and welfare effects," Journal of Public Economics, Elsevier, vol. 49(3), pages 313-331, December.
    35. Hindriks, Jean & Serse, Valerio, 2019. "Heterogeneity in the tax pass-through to spirit retail prices: Evidence from Belgium," Journal of Public Economics, Elsevier, vol. 176(C), pages 142-160.
    36. Thomas J. Holmes, 1998. "The Effect of State Policies on the Location of Manufacturing: Evidence from State Borders," Journal of Political Economy, University of Chicago Press, vol. 106(4), pages 667-705, August.
    37. 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.
    38. Atsuyuki Okabe & Masaki Aoyagi, 1991. "Existence of equilibrium configurations of competitive firms on an infinite two-dimensional space," Journal of Urban Economics, Elsevier, vol. 29(3), pages 349-370, May.
    39. Carolyn L. Evans, 2003. "The Economic Significance of National Border Effects," American Economic Review, American Economic Association, vol. 93(4), pages 1291-1312, September.
    40. Benoy Jacob & Daniel McMillen, 2015. "Border Effects in Suburban Land Use," National Tax Journal, National Tax Association;National Tax Journal, vol. 68(3S), pages 855-874, September.
    41. William H. Hoyt, 2017. "The assignment and division of the tax base in a system of hierarchical governments," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 24(4), pages 678-704, August.
    Full references (including those not matched with items on IDEAS)

    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. & Trandel, Gregory A., 2019. "Dynamics of policy adoption with state dependence," Regional Science and Urban Economics, Elsevier, vol. 79(C).
    2. 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.
    3. 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.
    4. 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.
    5. Hikaru Ogawa & Yasuhiro Sato & Toshiki Tamai, 2016. "Who gains from capital market integration? Tax competition between unionized and non-unionized countries," Canadian Journal of Economics, Canadian Economics Association, vol. 49(1), pages 76-110, February.
    6. Simon Naitram, 2022. "How big are strategic spillovers from corporate tax competition?," Economic Inquiry, Western Economic Association International, vol. 60(2), pages 847-869, April.
    7. 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.
    8. 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.
    9. David R. Agrawal & David E. Wildasin, 2019. "Sales Taxation, Spatial Agglomeration, and the Internet," CESifo Working Paper Series 7742, CESifo.
    10. 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.
    11. Jean Hindriks & Yukihiro Nishimura, 2021. "Taxing multinationals: The scope for enforcement cooperation," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 23(3), pages 487-509, June.
    12. Braid, Ralph M., 2013. "State and local tax competition in a spatial model with sales taxes and residential property taxes," Journal of Urban Economics, Elsevier, vol. 75(C), pages 57-67.
    13. Keuschnigg, Christian & Loretz, Simon & Winner, Hannes, 2014. "Tax Competition and Tax Coordination in the European Union: A Survey," Working Papers in Economics 2014-4, University of Salzburg.
    14. Boadway, Robin & Tremblay, Jean-François, 2012. "Reassessment of the Tiebout model," Journal of Public Economics, Elsevier, vol. 96(11), pages 1063-1078.
    15. Leonzio Rizzo, 2006. "Le inefficienze della competizione fiscale: una rassegna dei principali modelli teorici," Economia politica, Società editrice il Mulino, issue 1, pages 89-120.
    16. Marion, Justin & Muehlegger, Erich, 2018. "Tax compliance and fiscal externalities: Evidence from U.S. diesel taxation," Journal of Public Economics, Elsevier, vol. 160(C), pages 1-13.
    17. Mongrain, Steeve & Wilson, John D., 2018. "Tax competition with heterogeneous capital mobility," Journal of Public Economics, Elsevier, vol. 167(C), pages 177-189.
    18. Chirinko, Robert S. & Wilson, Daniel J., 2017. "Tax competition among U.S. states: Racing to the bottom or riding on a seesaw?," Journal of Public Economics, Elsevier, vol. 155(C), pages 147-163.
    19. Janeba, Eckhard & Schjelderup, Guttorm, 2023. "The global minimum tax raises more revenues than you think, or much less," Journal of International Economics, Elsevier, vol. 145(C).
    20. Rota-Graziosi, Grégoire, 2019. "The supermodularity of the tax competition game," Journal of Mathematical Economics, Elsevier, vol. 83(C), pages 25-35.

    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

    NEP fields

    This paper has been announced in the following NEP Reports:

    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:ces:ceswps:_11616. 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: Klaus Wohlrabe (email available below). General contact details of provider: https://edirc.repec.org/data/cesifde.html .

    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.