Indirect Tax Distortions in a Europe of Shopkeepers
The changed circumstances of the EU after 1992 have a given rise to concern about possible indirect tax competition and related economic distortions. This paper develops a model, incorporating both a production and a retail sector, to examine the effects of different VAT regimes. This model is applied to data on consumer behaviour in the proximity of the Ireland-UK and the Denmark-German borders showing that the potential size of ?border? areas, where distortion may be expected, is relatively small. The paper suggests that there are very limited incentives for governments to act strategically in choosing their indirect tax rates.
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