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

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

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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Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 91 (2007)
Issue (Month): 3-4 (April)
Pages: 451-479

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Handle: RePEc:eee:pubeco:v:91:y:2007:i:3-4:p:451-479
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505578

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  12. Michael J. Keen & Christos Kotsogiannis, 2002. "Tax competition in federations and the welfare consequences of decentralization," Discussion Papers 0201, Exeter University, Department of Economics.
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  22. 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.
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  25. Michael Keen, 1998. "Vertical Tax Externalities in the Theory of Fiscal Federalism," IMF Staff Papers, Palgrave Macmillan, vol. 45(3), pages 454-485, September.
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  27. Rizzo, Leonzio, 2005. "Interaction between Vertical and Horizontal tax Competition: Theory and Evidence," MPRA Paper 5334, University Library of Munich, Germany.
  28. Baltagi, Badi H & Levin, Dan, 1986. "Estimating Dynamic Demand for Cigarettes Using Panel Data: The Effects of Bootlegging, Taxation and Advertising Reconsidered," The Review of Economics and Statistics, MIT Press, vol. 68(1), pages 148-55, February.
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