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Will Destination-Based Taxes be Fully Exploited when Available? An Application to the U.S. Commodity Tax System

David Agrawal () and Mohammed Mardan ()

No 7365, CESifo Working Paper Series from CESifo Group Munich

Abstract: We develop a tax competition model that allows for the setting of both an origin-based and a destination-based commodity tax rate in the presence of avoidance and evasion. In the presence of evasion, jurisdictions will give cross-border shoppers tax preferential treatment, thus not fully exploiting the potential of destination-based taxation. Moreover, the divergence between origin-based and destination-based taxes is stronger when the incentives for consumers’ tax-arbitrage opportunities increase. The United States is one example of many such systems. While sales taxes are due at the point of sale, use taxes are due on goods purchased out-of-state. We document that when able to set both rates, a majority of jurisdictions levy destination-based use taxes at a lower rate than origin-based sales taxes. In response to changes in state-level policies that increase tax avoidance opportunities, the results of the empirical model broadly confirm our theory.

Keywords: tax evasion; tax avoidance; destination taxation; origin taxation; tax competition; use tax; sales tax (search for similar items in EconPapers)
JEL-codes: C72 H21 H25 H26 H77 P16 R51 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-acc, nep-iue, nep-pbe, nep-pub and nep-ure
Date: 2018
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