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Horizontal and Vertical Indirect Tax Competition: Theory and Some Evidence From the USA

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Author Info
Devereux, Michael P
Lockwood, Ben
Redoano, Michela

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Abstract

This Paper provides a simple theoretical framework for analysing simultaneous vertical and horizontal competition in excise taxes, and estimates equations informed by the theory on a panel of US state and federal excise taxes on cigarettes and gasoline. We also examine the role played by smuggling. The results are generally consistent with the theory, when the characteristics of the markets for the goods are taken into account. For neither good do federal excise taxes affect state taxes. Taxes in neighbouring states have a significant and large effect in the case of cigarettes, and a much weaker effect in the case of gasoline. We also find that in the setting of cigarette taxes, concerns about cross-border shopping play a more important role than concerns about smuggling.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4470.

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Date of creation: Jul 2004
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Handle: RePEc:cpr:ceprdp:4470

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Related research
Keywords: cross-border shopping excise taxes smuggling tax competitions

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Find related papers by JEL classification:
H70 - Public Economics - - State and Local Government; Intergovernmental Relations - - - General
H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Saba, Richard P, et al, 1995. "The Demand for Cigarette Smuggling," Economic Inquiry, Oxford University Press, vol. 33(2), pages 189-202, April.
  2. Rizzo, Leonzio, 2005. "Interaction between Vertical and Horizontal tax Competition: Theory and Evidence," MPRA Paper 5334, University Library of Munich, Germany. [Downloadable!]
  3. Chaloupka, Frank, 1991. "Rational Addictive Behavior and Cigarette Smoking," Journal of Political Economy, University of Chicago Press, vol. 99(4), pages 722-42, August. [Downloadable!] (restricted)
    Other versions:
  4. Goodspeed, Timothy J., 2002. "Tax competition and tax structure in open federal economies: Evidence from OECD countries with implications for the European Union," European Economic Review, Elsevier, vol. 46(2), pages 357-374, February. [Downloadable!] (restricted)
    Other versions:
  5. 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 877-92, September. [Downloadable!] (restricted)
    Other versions:
  6. Michael Keen, 1998. "Vertical Tax Externalities in the Theory of Fiscal Federalism," IMF Staff Papers, Palgrave Macmillan Journals, vol. 45(3), pages 3. [Downloadable!] (restricted)
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  7. Gary S. Becker & Michael Grossman & Kevin M. Murphy, 1994. "An Empirical Analysis of Cigarette Addiction," NBER Working Papers 3322, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. Besley, Timothy J. & Rosen, Harvey S., 1998. "Vertical externalities in tax setting: evidence from gasoline and cigarettes," Journal of Public Economics, Elsevier, vol. 70(3), pages 383-398, December. [Downloadable!] (restricted)
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  9. Esteller-More, Alex & Sole-Olle, Albert, 2001. "Vertical income tax externalities and fiscal interdependence: evidence from the US," Regional Science and Urban Economics, Elsevier, vol. 31(2-3), pages 247-272, April. [Downloadable!] (restricted)
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  10. Nielsen, Soren Bo, 2001. " A Simple Model of Commodity Taxation and Cross-Border Shopping," Scandinavian Journal of Economics, Blackwell Publishing, vol. 103(4), pages 599-623, December. [Downloadable!] (restricted)
  11. Besley, Timothy J. & Smart, Michael, 2002. "Does Tax Competition Raise Voter Welfare?," CEPR Discussion Papers 3131, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  12. Benjamin, Daniel K & Dougan, William R, 1997. "Efficient Excise Taxation: The Evidence from Cigarettes," Journal of Law & Economics, University of Chicago Press, vol. 40(1), pages 113-36, April.
  13. Michael J. Keen & Christos Kotsogiannis, 2002. "Does Federalism Lead to Excessively High Taxes?," American Economic Review, American Economic Association, vol. 92(1), pages 363-370, March. [Downloadable!] (restricted)
  14. repec:rus:hseeco:110836 is not listed on IDEAS
  15. Marie C. Thursby & Jerry G. Thursby, 1994. "Interstate Cigarette Bootlegging: Extent, Revenue Losses, and Effects of Government Intervention," NBER Working Papers 4763, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  16. Jeffrey E. Harris & Sandra W. Chan, 1999. "The continuum-of-addiction: cigarette smoking in relation to price among Americans aged 15-29," Health Economics, John Wiley & Sons, Ltd., vol. 8(1), pages 81-86.
  17. Keen, Michael J. & Kotsogiannis, Christos, 2004. "Tax competition in federations and the welfare consequences of decentralization," Journal of Urban Economics, Elsevier, vol. 56(3), pages 397-407, November. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Rizzo, Leonzio, 2005. "Interaction between Vertical and Horizontal tax Competition: Theory and Evidence," MPRA Paper 5334, University Library of Munich, Germany. [Downloadable!]
  2. Michiel Evers & Ruud A. de Mooij & Herman R. J. Vollebergh, 2004. "Tax Competition under Minimum Rates: The Case of European Diesel Excises," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
    Other versions:
  3. Rizzo, Leonzio, 2007. "Interaction between vertical and horizontal tax competition: evidence and some theory," MPRA Paper 8632, University Library of Munich, Germany, revised 2008. [Downloadable!]
  4. Marius BRÜLHART & Mario JAMETTI, 2004. "Vertical Versus Horizontal Tax Externalities: An Empirical Test," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 04.11, Université de Lausanne, Faculté des HEC, DEEP. [Downloadable!]
    Other versions:
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