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Asymmetric competition in the setting of diesel excise taxes in EU countries

Laszlo Paizs ()

Acta Oeconomica, 2013, vol. 63, issue 4, 423-450

Abstract: This paper tests new implications of the asymmetric tax competition model on diesel excise taxes. We 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 tested on panel data in first differences for 16 countries of Western Europe. 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 neighbouring 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 harmonise diesel tax rates.

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)
Date: 2013
Note: I would like to express my gratitude to Gábor Kézdi for his encouragement and generous support during the course of this work. I also thank Péter Kaderják, Gábor Koltay, Marianna Kopasz, Tamás Meszerics, Pál Valentiny, Hendrik Vrijburg and the participants at the 63rd Congress of the International Institute of Public Finance, Warwick, at the 2007 Labsi International Conference, Siena, at the 2007 annual conference of the Hungarian Society of Economics, Budapest, at the research day of the Institute of Economics of the Hungarian Academy of Sciences, Budapest, 2008, for helpful comments and discussions. This research was supported by a grant from the CERGE-EI Foundation under a program of the Global Development Network. All opinions expressed are those of the author and have not been endorsed by CERGE-EI or the GDN. Journal: Acta Oeconomica
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Handle: RePEc:aka:aoecon:v:63:y:2013:i:4:p:423-450