Sensitivity versus size: implications for tax competition

David Agrawal, Adib Bagh () and Mohammed Mardan ()
Additional contact information
Adib Bagh: Departments of Economics and Mathematics, University of Kentucky
Mohammed Mardan: Department of Business and Management Science, Norwegian School of Economics (NHH)

Theoretical Economics, Forthcoming

Abstract: The conventional wisdom is that a big jurisdiction sets a higher tax rate than a small jurisdiction. We show this result arises due to simplifying assumptions that imply tax-base sensitivities are equal across jurisdictions. When more than two jurisdictions compete in commodity taxes, tax-base sensitivities need not be equal across jurisdictions and a small jurisdiction can set a higher tax rate than a big jurisdiction. Our analysis extends to capital and profit taxes, and, more generally, to various types of multi-player asymmetric competition.

Keywords: Ramsey rule; inverse elasticity; fiscal competition; optimal taxation; spatial price competition; sales tax (search for similar items in EconPapers)
JEL-codes: C7 D4 H2 H7 L1 R5 (search for similar items in EconPapers)
Date: 2025-01-28
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http://econtheory.org/ojs/index.php/te/article/viewForthcomingFile/5338/41147/1 Working paper version. Paper will be copyedited and typeset before publication. (application/pdf)

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Working Paper: Sensitivity Versus Size: Implications for Tax Competition (2025)
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