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Asymmetric Competition in the Setting of Diesel Excise Taxes in EU Countries

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  • Laszlo Paizs

    (Institute of Economics - Hungarian Academy of Sciences)

Abstract

This paper tests new implications of the asymmetric tax competition model on diesel excise taxes in the European Union (EU). I extend the standard tax competition model by replacing the unit demand assumption with iso-elastic demand. As a result, not only the level of the equilibrium tax but also the slope of the tax reaction function depends positively on the size of the country. The new implication is testable on panel data in first differences, and it is tested on a panel of 16 European countries. The results provide strong evidence for strategic interaction in the setting of diesel excises and confirm the effect of country size on the response to tax changes in neighboring countries. Strategic interaction between EU countries intensified in the mid 1990s and drove small European countries to set lower diesel tax rates. These results explain why the EU's minimum tax policy has failed to harmonize diesel tax rates across member states.

Suggested Citation

  • Laszlo Paizs, 2010. "Asymmetric Competition in the Setting of Diesel Excise Taxes in EU Countries," CERS-IE WORKING PAPERS 1012, Institute of Economics, Centre for Economic and Regional Studies.
    • Handle: RePEc:has:discpr:1012
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    References listed on IDEAS

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    Cited by:

    1. Mandell, Svante & Proost, Stef, 2016. "Why truck distance taxes are contagious and drive fuel taxes to the bottom," Journal of Urban Economics, Elsevier, vol. 93(C), pages 1-17.
    2. Laszlo A. Koczy & Martin Strobel, 2010. "The World Cup of Economics Journals: A Ranking by a Tournament Method," CERS-IE WORKING PAPERS 1018, Institute of Economics, Centre for Economic and Regional Studies.

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    More about this item

    Keywords

    tax competition; minimum tax; asymmetric regions; diesel excise; European Union;
    All these keywords.

    JEL classification:

    • H70 - Public Economics - - State and Local Government; Intergovernmental Relations - - - General
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods

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