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Indirect taxes in a cross-border shopping model: a monopolistic competition approach

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  • Hiroshi Aiura

    (Nanzan University)

  • Hikaru Ogawa

    (University of Tokyo)

Abstract

In a model of cross-border shopping with monopolistic competition, we examine the relative merits of an ad valorem (ADV) tax and a unit (specific) tax. Our focus is on the effects of the opening of borders that enables consumption outside the country of the residence. The result shows that the increased cross-border shopping may strengthen or weaken the superiority of either of the two tax methods, depending on the relative weight that the government places on tax revenue and welfare. Specifically, while cross-border shopping always increases the welfare of all countries in ADV tax competition, welfare increases only when the governments place a large weight on tax revenue in unit tax competition. Cross-border shopping lowers welfare when governments with high weight on welfare compete in unit tax.

Suggested Citation

  • Hiroshi Aiura & Hikaru Ogawa, 2019. "Indirect taxes in a cross-border shopping model: a monopolistic competition approach," Journal of Economics, Springer, vol. 128(2), pages 147-175, October.
    • Handle: RePEc:kap:jeczfn:v:128:y:2019:i:2:d:10.1007_s00712-019-00659-7
    DOI: 10.1007/s00712-019-00659-7
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Monopolistic competition; Spatial tax competition; Unit and ad valorem taxes;
    All these keywords.

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H7 - Public Economics - - State and Local Government; Intergovernmental Relations

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