Indirect taxes in a cross-border shopping model: a monopolistic competition approach
- 101 Downloads
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.
KeywordsMonopolistic competition Spatial tax competition Unit and ad valorem taxes
JEL ClassificationH2 H7
An earlier version of this paper was presented at ARSC2013 and NARSC2013. We would like to thank Takanori Ago and Johan Lundberg for their helpful comments. In addition, the comments of anonymous referees and the editor Giacomo Corneo have substantially improved this paper. Any mistakes herein are, of course, our own. The research has been supported by JSPS KAKENHI (Grant Numbers JP25245042, JP16K12374, JP17H02533, JP18H00865, JP18K01632), and the Nitto Foundation.
- Bygvra S (2011) The road to the single European market as seen through the Danish retail trade: cross-border shopping between Denmark and Germany. Int Rev Retail Distrib Consum Res 8:147–164Google Scholar
- Dixit A, Stiglitz J (1977) Monopolistic competition and optimum product diversity. Am Econ Rev 67:297–308Google Scholar
- Fitzgerald J, Quinn T, Whelan R, Williams J (1988) An analysis of cross-border shopping. Economic & Social Research Institute, DublinGoogle Scholar
- Kawachi K, Ogawa H, Susa T (2018) Endogenizing government’s objectives in tax competition with capital ownership. Int Tax Public Finance. https://doi.org/10.1007/s10797-018-9516-1
- Tömöri M (2010) Investing shopping tourism along the borders of Hungary: a theoretical perspective. Geo J Tour Geosites 6:202–210Google Scholar