Sales tax competition and a multinational with a decreasing marginal cost
AbstractWe examine a multinational firm which has a decreasing marginal cost, and the optimal sales tax policies of the regions where that firm operates. We show that the regions set higher sales taxes than those given by a cooperative equilibrium. Each region fails to fully internalize the effects of its tax level on another region's welfare and the incentives for that region's authority. Exponential cost functions which exhibit economies of scale (for example Cobb-Douglas) and linear demand functions satisfy our assumptions. Our results suggest the need to coordinate sales tax levels between countries and between smaller entities, like states in the United States. Smaller regions benefit more from such coordination. Lowering sales taxes in each region increases welfare for all regions, profits for firms, and consumer welfare.
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Bibliographic InfoPaper provided by ESMT European School of Management and Technology in its series ESMT Research Working Papers with number ESMT-11-01.
Length: 22 pages
Date of creation: 24 Mar 2011
Date of revision:
tax competition; sales taxes; multinationals; decreasing marginal cost; economies of scale;
Find related papers by JEL classification:
- F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies
- F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
- H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
- H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
This paper has been announced in the following NEP Reports:
- NEP-ACC-2011-04-02 (Accounting & Auditing)
- NEP-ALL-2011-04-02 (All new papers)
- NEP-PBE-2011-04-02 (Public Economics)
- NEP-URE-2011-04-02 (Urban & Real Estate Economics)
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