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Sales tax competition and a multinational with a decreasing marginal cost

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  • Alexei Alexandrov

    (Simon Graduate School of Business, University of Rochester)

  • Özlem Bedre-Defolie

    (ESMT European School of Management and Technology)

Abstract

We 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 Info

Paper provided by ESMT European School of Management and Technology in its series ESMT Research Working Papers with number ESMT-11-01.

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Length: 22 pages
Date of creation: 24 Mar 2011
Date of revision:
Handle: RePEc:esm:wpaper:esmt-11-01

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Keywords: tax competition; sales taxes; multinationals; decreasing marginal cost; economies of scale;

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  1. Devereux, Michael P. & Lockwood, Ben & Redoano, Michela, 2008. "Do countries compete over corporate tax rates?," Journal of Public Economics, Elsevier, Elsevier, vol. 92(5-6), pages 1210-1235, June.
  2. Michael J. Keen & Christos Kotsogiannis, 2002. "Does Federalism Lead to Excessively High Taxes?," American Economic Review, American Economic Association, American Economic Association, vol. 92(1), pages 363-370, March.
  3. Simon P. Anderson & Andre de Palma & Brent Kreider, 2000. "Tax Incidence in Differentiated Product Oligopoly," Virginia Economics Online Papers 341, University of Virginia, Department of Economics.
  4. Becker, Johannes & Fuest, Clemens, 2010. "EU regional policy and tax competition," European Economic Review, Elsevier, Elsevier, vol. 54(1), pages 150-161, January.
  5. John Burbidge & Katherine Cuff, 2002. "Capital Tax Competition and Returns to Scale," Working Papers 03002, University of Waterloo, Department of Economics, revised Sep 2003.
  6. Calzolari, Giacomo, 2001. "The Theory and Practice of Regulation with Multinational Enterprises," Journal of Regulatory Economics, Springer, Springer, vol. 20(2), pages 191-211, September.
  7. Bond, Eric W & Samuelson, Larry, 1989. "Strategic Behaviour and the Rules for International Taxation of Capital," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 99(398), pages 1099-1111, December.
  8. Ackerberg, Daniel & Caves, Kevin & Frazer, Garth, 2006. "Structural identification of production functions," MPRA Paper 38349, University Library of Munich, Germany.
  9. Zhiqi Chen & Thomas Ross, 2007. "Markets Linked by Rising Marginal Costs: Implications for Multimarket Contact, Recoupment, and Retaliatory Entry," Review of Industrial Organization, Springer, Springer, vol. 31(1), pages 1-21, August.
  10. Bond, Eric W. & Gresik, Thomas A., 1996. "Regulation of multinational firms with two active governments: A common agency approach," Journal of Public Economics, Elsevier, Elsevier, vol. 59(1), pages 33-53, January.
  11. Thomas A. Gresik, 2001. "The Taxing Task of Taxing Transnationals," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 39(3), pages 800-838, September.
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