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

  • Hikaru Ogawa

    ()

  • Hiroshi Aiura

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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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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