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Horizontal and vertical indirect tax competition: Theory and some evidence from the USA

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  • Devereux, M.P.
  • Lockwood, B.
  • Redoano, M.

Abstract

This paper provides a simple theoretical framework for analyzing 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 neighboring 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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  • Devereux, M.P. & Lockwood, B. & Redoano, M., 2007. "Horizontal and vertical indirect tax competition: Theory and some evidence from the USA," Journal of Public Economics, Elsevier, vol. 91(3-4), pages 451-479, April.
  • Handle: RePEc:eee:pubeco:v:91:y:2007:i:3-4:p:451-479
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    More about this item

    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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