Asymmetric Competition in the Setting of Diesel Excise Taxes in EU Countries

Laszlo Paizs ()
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Laszlo Paizs: Institute of Economics - Hungarian Academy of Sciences

No 1012, CERS-IE WORKING PAPERS from Institute of Economics, Centre for Economic and Regional Studies

Abstract: This paper tests new implications of the asymmetric tax competition model on diesel excise taxes in the European Union (EU). I extend the standard tax competition model by replacing the unit demand assumption with iso-elastic demand. As a result, not only the level of the equilibrium tax but also the slope of the tax reaction function depends positively on the size of the country. The new implication is testable on panel data in first differences, and it is tested on a panel of 16 European countries. The results provide strong evidence for strategic interaction in the setting of diesel excises and confirm the effect of country size on the response to tax changes in neighboring countries. Strategic interaction between EU countries intensified in the mid 1990s and drove small European countries to set lower diesel tax rates. These results explain why the EU's minimum tax policy has failed to harmonize diesel tax rates across member states.

Keywords: tax competition; minimum tax; asymmetric regions; diesel excise; European Union (search for similar items in EconPapers)
JEL-codes: H70 H77 H87 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2010-06
New Economics Papers: this item is included in nep-acc, nep-ene, nep-eur, nep-pbe and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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