Advertisement

Tax competition and the efficiency of “benefit-related” business taxes

  • Elisabeth Gugl
  • George R. Zodrow
Article

Abstract

We construct a tax competition model in which local governments finance business public services with either a source-based tax on mobile capital, such as a property tax, or a tax on production, such as an origin-based value-added tax, and then assess which of the two tax instruments is more efficient. Many taxes on business apply to mobile inputs or outputs, such as property taxes, retail sales taxes, and destination-based VATs, and their inefficiency has been examined in the literature; however, proposals from several prominent tax experts to utilize a local origin-based VAT have not been analyzed theoretically. Our primary finding is that the production tax is less inefficient than the capital tax under many—but not all—conditions. The intuition underlying this result is that the efficiency of a user fee on the public business input is roughly approximated by a production tax, which applies to both the public input and immobile labor (in addition to mobile capital). In marked contrast, the capital tax applies only to mobile capital and is thus likely to be relatively inefficient.

Keywords

Tax competition Business taxes Business public services Production tax Capital tax 

JEL Classification

H410 H420 H210 H110 

Notes

Acknowledgements

We thank an anonymous referee, Steve Billon, Jed Brewer, Alexander Ebertz, Bill Fox, Timothy Goodspeed, Brad Hackinen, Andreas Haufler, James Hines, Margaret McKeehan, Matt Krzepkowski, David Wildasin, and John Wilson for helpful comments on earlier versions of this paper.

References

  1. Bayindir-Upmann, T. (1998). Two games of interjurisdictional competition when local governments provide industrial public goods. International Tax and Public Finance, 5, 471–487.CrossRefGoogle Scholar
  2. Bird, R. M. (2000). Subnational VATs: Experience and prospects. In Proceedings. Annual conference on taxation and minutes of the annual meeting of the National Tax Association (Vol. 93, pp. 223–228).Google Scholar
  3. Bird, R. M. (2003). A new look at business taxes. Tax Notes International, 30(7), 695–711.Google Scholar
  4. Bird, R. M., & Gendron, P.-P. (2007). The VAT in developing and transitional countries. Cambridge: Cambridge University Press.CrossRefGoogle Scholar
  5. CBC News. (2011). B.C. promises HST cut to 10% by 2014: Tax hike for corporations and cheques for families also promised. http://www.cbc.ca/news/canada/britishcolumbia/story/2011/05/25/bc-hst-changes.html. Accessed 15 August 2018.
  6. Crawford, I., Keen, M., & Smith, S. (2010). Value-added tax and excises. In Institute for Fiscal Studies (Ed.), Dimensions of tax design: The Mirrlees review (pp. 275–362). London: Oxford University Press.Google Scholar
  7. Dhillon, A., Wooders, M., & Zissimos, B. (2007). Tax competition reconsidered. Journal of Public Economic Theory, 9(3), 391–423.CrossRefGoogle Scholar
  8. Faggiano, M. (2017). Origin-based and destination-based sales tax collection 101. https://blog.taxjar.com/charging-sales-tax-rates/. Accessed 31 August 2018.
  9. Gugl, E., & Zodrow, G. R. (2015). Competition in business taxes and public services: Are production-based taxes superior to capital taxes? National Tax Journal, 68(3S), 767–802.CrossRefGoogle Scholar
  10. Hall, R., & Rabushka, A. (2007). The flat tax. Stanford, CA: Hoover Institution Press.Google Scholar
  11. Haufler, A., & Pfļueger, M. (2007). International oligopoly and the taxation of commerce with revenue-constrained governments. Economica, 74(295), 451–473.CrossRefGoogle Scholar
  12. Hines, J. R., Jr. (2003). Michigan’s flirtation with the single business tax. In C. L. Ballard, P. N. Courant, D. C. Drake, R. C. Fischer, & E. R. Gerber (Eds.), Michigan at the Millennium: A benchmark and analysis of its fiscal and economic structure (pp. 603–628). East Lansing: Michigan State University Press.Google Scholar
  13. Kanbur, R., & Keen, M. (1993). Jeux sans frontiers: Tax competition and tax coordination when countries differ in size. American Economic Review, 83(4), 877–892.Google Scholar
  14. Keen, M., & Marchand, M. (1997). Fiscal competition and the pattern of public spending. Journal of Public Economics, 66(1), 33–53.CrossRefGoogle Scholar
  15. Lockwood, B. (2001). Tax competition and tax co-ordination under destination and origin principles: A synthesis. Journal of Public Economics, 81(2), 279–319.CrossRefGoogle Scholar
  16. Matsumoto, M. (1998). A note on tax competition and public input provision. Regional Science and Urban Economics, 28(4), 465–473.CrossRefGoogle Scholar
  17. Matsumoto, M. (2000). A tax competition analysis of congestible public inputs. Journal of Urban Economics, 48(2), 242–259.CrossRefGoogle Scholar
  18. Matsumoto, M., & Sugahara, K. (2017). A note on production taxation and public-input provision. The Annals of Regional Sciences, 59(2), 419–426.CrossRefGoogle Scholar
  19. McLure, C. E., Jr. (2003). The value added tax on electronic commerce in the European Union. International Tax and Public Finance, 10(6), 753–762.CrossRefGoogle Scholar
  20. Mintz, J. M., & Tulkens, H. (1986). Commodity tax competition between member states of a federation, equilibrium and efficiency. Journal of Public Economics, 29(2), 133–372.CrossRefGoogle Scholar
  21. Noiset, L. (1995). Pigou, Tiebout, property taxation, and the underprovision of local public goods: A comment. Journal of Urban Economics, 38(3), 312–316.CrossRefGoogle Scholar
  22. Oates, W. E., & Schwab, R. M. (1988). Economic competition among jurisdictions: Efficiency enhancing or distortion inducing?”. Journal of Public Economics, 35(3), 333–354.CrossRefGoogle Scholar
  23. Oates, W. E., & Schwab, R. M. (1991). The allocative and distributive implications of local fiscal competition. In D. A. Kenyon & J. Kincaid (Eds.), Competition among states and local governments: Efficiency and equity in American federalism (pp. 127–146). Washington, DC: The Urban Institute Press.Google Scholar
  24. Richter, W. F. (1994). The efficient allocation of local public factors in Tiebout’s tradition. Regional Science and Urban Economics, 24(3), 323–340.CrossRefGoogle Scholar
  25. Sinn, H.-W. (1997). The selection principle and market failure in systems of competition. Journal of Public Economics, 66(2), 247–274.CrossRefGoogle Scholar
  26. The Independent Panel. (2011). HST or PST/GST: It’s your decision. http://www.slideshare.net/hstinbc/its-your-decisionhstgstpst. Accessed 15 August 15 2018.
  27. Wilson, J. D. (1986). A theory of interregional tax competition. Journal of Urban Economics, 19(3), 296–315.CrossRefGoogle Scholar
  28. Wilson, J. D. (1999). Theories of tax competition. National Tax Journal, 52(2), 269–304.Google Scholar
  29. Wilson, J. D., & Wildasin, D. E. (2004). Tax competition: Bane or boon? Journal of Public Economics, 88(6), 1065–1091.CrossRefGoogle Scholar
  30. Zodrow, G. R. (2003). Tax competition and tax coordination in the European Union. International Tax and Public Finance, 10, 651–671.CrossRefGoogle Scholar
  31. Zodrow, G. R. (2010). Capital mobility and capital tax competition. National Tax Journal, 63(4), 865–901.CrossRefGoogle Scholar
  32. Zodrow, G. R., & Mieszkowski, P. (1986). Pigou, Tiebout, property taxation and the underprovision of local public goods. Journal of Urban Economics, 19(3), 356–370.CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2018

Authors and Affiliations

  1. 1.Department of EconomicsUniversity of VictoriaVictoriaCanada
  2. 2.Department of EconomicsRice UniversityHoustonUSA

Personalised recommendations