Interaction between Vertical and Horizontal tax Competition: Theory and Evidence

Leonzio Rizzo ()

MPRA Paper from University Library of Munich, Germany

Abstract: We develop a model with two provinces, producing two goods: one mobile and the other not. The mobile good is taxed according to the destination principle by the local government; it is also federally taxed. People decide to buy the good at the most advantageous price. Namely they can buy bootlegged cigarettes and, if the price is very high in both provinces, they can decide to buy smuggled cigarettes, on which no tax is levied. The two provinces engage in tax competition. The province tax-reaction function are non linear because of scale economies in the cost of bootlegging. An increase in federal tax offsets the non linearity, because it decreases the magnitude of the horizontal externality. We test the theoretical results by using Canada-US data set from 1984-1994.

Keywords: horizontal externality; vertical externality; tax competition; tax rate (search for similar items in EconPapers)
JEL-codes: H2 H20 H21 H23 H70 H71 H72 H73 H77 (search for similar items in EconPapers)
Date: 2005-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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