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The Tax Gradient: Spatial Aspects of Fiscal Competition

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  • David R. Agrawal

Abstract

State borders create a discontinuous tax treatment of retail sales. In a Nash game, local tax rates will be higher on the low-state-tax side of a border. Local taxes will decrease from the nearest high-tax border and increase from the low-tax border. Using driving time from state borders and all local sales tax rates, local tax rates on the low-tax side of the border are 1.25 percentage points higher, reducing the differential in state tax rates by over three-quarters. A ten minute increase in driving time from the nearest high-tax state lowers a border town’s local tax rate by 6%.

Suggested Citation

  • David R. Agrawal, 2015. "The Tax Gradient: Spatial Aspects of Fiscal Competition," CESifo Working Paper Series 5292, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_5292
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    File URL: https://www.cesifo-group.de/DocDL/cesifo1_wp5292.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    sales taxes; cross-border shopping; tax competition; fiscal federalism;

    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • R51 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - Finance in Urban and Rural Economies

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