Tax Reform on Monopoly Platformer in Borderless Economy: The Incidence on Prices and Efficiency Consequences

Shigeo Morita (shmorita@fukuoka-u.ac.jp), Yukihiro Nishimura (ynishimu@econ.osaka-u.ac.jp) and Hirofumi Okoshi
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Shigeo Morita: Fukuoka University
Yukihiro Nishimura: Osaka University and CESifo

No 25-02, Discussion Papers in Economics and Business from Osaka University, Graduate School of Economics

Abstract: As development of online market brings ongoing concerns that foreign app suppliers avoid value-added tax (VAT) in a domestic country, some countries design a tax reform which makes platform pay VAT instead of app suppliers (platform taxation). In the market where the monopoly platformer determines the prices of the network good and the commission fee of the platform services (with online apps as a representative example), this study investigates whether the prevention of tax leaks by platform tax improves the welfare of the host country, as well as the extent of the cross-market incidence of the two-sided market. We find that the tax reform reduces foreign app suppliers and consumption of a network good such as smartphones, with substantial extent of cross-market pass-through. The effect of the tax reform on home app suppliers crucially depends on the responsiveness of the app supplies from the number of users, which we call entry elasticity. Platform tax also increases the tax burden laid on the network product, but the monopoly seller let the increase of the tax burden born entirely by consumers. We also show that digitalization reduces the loss of welfare as well as tax planning by the platformer.

Keywords: Value-added tax; Tax reform; Digital economy; Platform; Network externality (search for similar items in EconPapers)
JEL-codes: F23 H26 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2025-02
New Economics Papers: this item is included in nep-acc, nep-com, nep-pay, nep-pbe and nep-pub
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Persistent link: https://EconPapers.repec.org/RePEc:osk:wpaper:2502

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