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Unit Tax versus Ad Valorem Tax: A Tax Competition Model with Cross-border Shopping

  • Hikaru Ogawa

    ()

  • Hiroshi Aiura
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    Within the framework of spatial tax competition with cross-border shopping, we examine the choice of tax method between ad valorem tax and unit (specific) tax. The paper shows that governments endogenously choose ad valorem tax not because of a classic welfare reason, but because it is a good strategy in competing for mobile customers. Another key finding is that while governments are committed to the ad valorem tax method, the choice is not efficient; Tax-cutting competition becomes more serious when countries adopt ad valorem tax, and competition in ad valorem tax yields smaller payoffs than competition in unit tax.

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    File URL: http://www-sre.wu.ac.at/ersa/ersaconfs/ersa12/e120821aFinal00430.pdf
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    Paper provided by European Regional Science Association in its series ERSA conference papers with number ersa12p428.

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    Date of creation: Oct 2012
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    Handle: RePEc:wiw:wiwrsa:ersa12p428
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    1. Haufler, Andreas, 1996. "Tax Coordination with Different Preferences for Public Goods: Conflict or Harmony of Interest?," Munich Reprints in Economics 20392, University of Munich, Department of Economics.
    2. You-Qiang Wang, 1999. "Commodity Taxes under Fiscal Competition: Stackelberg Equilibrium and Optimality," American Economic Review, American Economic Association, vol. 89(4), pages 974-981, September.
    3. Kanbur, Ravi & Keen, Michael, 1993. "Jeux Sans Frontieres: Tax Competition and Tax Coordination When Countries Differ in Size," American Economic Review, American Economic Association, vol. 83(4), pages 877-92, September.
    4. Mintz, Jack & Tulkens, Henry, 1986. "Commodity tax competition between member states of a federation: equilibrium and efficiency," Journal of Public Economics, Elsevier, vol. 29(2), pages 133-172, March.
    5. MORICONI, Simone & SATO, Yasuhiro, 2006. "International commodity taxation in the presence of unemployment," CORE Discussion Papers 2006069, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    6. Søren Bo Nielsen, . "A Simple Model of Commodity Taxation and Cross-Border Shopping," EPRU Working Paper Series 98-18, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
    7. Lockwood, Ben, 1993. "Commodity tax competition under destination and origin principles," Journal of Public Economics, Elsevier, vol. 52(2), pages 141-162, September.
    8. Trandel, Gregory A., 1994. "Interstate commodity tax differentials and the distribution of residents," Journal of Public Economics, Elsevier, vol. 53(3), pages 435-457, March.
    9. de Crombrugghe, Alain & Tulkens, Henry, 1990. "On Pareto improving commodity tax changes under fiscal competition," Journal of Public Economics, Elsevier, vol. 41(3), pages 335-350, April.
    10. Vander Lucas, 2002. "Cross-border shopping in a federal economy," Economics Bulletin, AccessEcon, vol. 28(12), pages A0.
    11. Braid Ralph M., 1993. "Spatial Competition between Jurisdictions Which Tax Perfectly Competitive Retail (or Production) Centers," Journal of Urban Economics, Elsevier, vol. 34(1), pages 75-95, July.
    12. Lockwood, Ben & Wong, Kar-yiu, 2000. "Specific and ad valorem tariffs are not equivalent in trade wars," Journal of International Economics, Elsevier, vol. 52(1), pages 183-195, October.
    13. Braid, Ralph M., 2000. "A Spatial Model of Tax Competition with Multiple Tax Instruments," Journal of Urban Economics, Elsevier, vol. 47(1), pages 88-114, January.
    14. Nielsen, Soren Bo, 2002. "Cross-border shopping from small to large countries," Economics Letters, Elsevier, vol. 77(3), pages 309-313, November.
    15. Nobuo Akai & Hikaru Ogawa & Yoshitomo Ogawa, 2010. "Endogenous Choice on Tax Instruments in a Tax Competition Model: Unit Tax versus Ad Valorem Tax," Discussion Papers in Economics and Business 10-01, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
    16. Ben Lockwood, 2004. "Competition in Unit vs. Ad Valorem Taxes," International Tax and Public Finance, Springer, vol. 11(6), pages 763-772, November.
    17. Jan Jørgensen & Philipp Schröder, 2005. "Welfare-ranking ad valorem and specific tariffs under monopolistic competition," Canadian Journal of Economics, Canadian Economics Association, vol. 38(1), pages 228-241, February.
    18. Michael Keen, 1998. "The balance between specific and ad valorem taxation," Fiscal Studies, Institute for Fiscal Studies, vol. 19(1), pages 1-37, February.
    19. Kimberley Scharf, 1999. "Scale Economies in Cross-Border Shopping and Commodity Taxation," International Tax and Public Finance, Springer, vol. 6(1), pages 89-99, February.
    20. Ohsawa, Yoshiaki, 1999. "Cross-border shopping and commodity tax competition among governments," Regional Science and Urban Economics, Elsevier, vol. 29(1), pages 33-51, January.
    21. Yoshiaki Ohsawa & Takeshi Koshizuka, 2003. "Two-dimensional fiscal competition," Journal of Economic Geography, Oxford University Press, vol. 3(3), pages 275-287, July.
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