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Indirect taxes in a cross-border shopping model: a monopolistic competition approach

Hiroshi Aiura () and Hikaru Ogawa
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Hiroshi Aiura: Nanzan University

Journal of Economics, 2019, vol. 128, issue 2, 147-175

Abstract: Abstract In a model of cross-border shopping with monopolistic competition, we examine the relative merits of an ad valorem (ADV) tax and a unit (specific) tax. Our focus is on the effects of the opening of borders that enables consumption outside the country of the residence. The result shows that the increased cross-border shopping may strengthen or weaken the superiority of either of the two tax methods, depending on the relative weight that the government places on tax revenue and welfare. Specifically, while cross-border shopping always increases the welfare of all countries in ADV tax competition, welfare increases only when the governments place a large weight on tax revenue in unit tax competition. Cross-border shopping lowers welfare when governments with high weight on welfare compete in unit tax.

Keywords: Monopolistic competition; Spatial tax competition; Unit and ad valorem taxes (search for similar items in EconPapers)
JEL-codes: H2 H7 (search for similar items in EconPapers)
Date: 2019
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Working Paper: Indirect Taxes in the Cross-border Shopping Model: A Monopolistic Competition Approach (2016) Downloads
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