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

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 incre...

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Bibliographic Details
Published in:Journal of economics (Vienna, Austria) Austria), 2019-10, Vol.128 (2), p.147-175
Main Authors: Aiura, Hiroshi, Ogawa, Hikaru
Format: Article
Language:English
Subjects:
Borders
Competition
Consumption
Dominance
Economic models
Economic theory
Economic Theory/Quantitative Economics/Mathematical Methods
Economics
Economics and Finance
Game Theory
Macroeconomics/Monetary Economics//Financial Economics
Microeconomics
Monopolistic competition
Public Finance
Residence
Shopping
Social and Behav. Sciences
Tax revenues
Taxation
Welfare
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Summary: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.
ISSN:0931-8658
1617-7134
DOI:10.1007/s00712-019-00659-7