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The Internet as a Tax Haven?: The Effect of the Internet on Tax Competition

David R. Agrawal

University of Georgia - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

August 2014

Firms with a physical presence in a consumer’s state are required to remit state and local sales taxes on online sales; sales from remote vendors without a physical presence are not subject to sales tax remittance. Theoretically, a large fraction of shoppers with Internet access will put downward pressure on tax rates as jurisdictions seek to reduce revenue leakage to a tax-free source; but, taxable online sales will put upward pressure on tax rates because the Internet acts as an effective means of enforcing sales taxes. I use novel data – all municipal and county sales tax rates in the country and Internet penetration rates at the municipal level from 2011 – to test the theory. Exploiting tax discontinuities at state borders, I find that that an increase in the Internet penetration rate induces large municipalities on the low-tax side of state borders to lower their local tax rates by more than municipalities on the high-tax side; this result is consistent with towns on the high-tax side having less brick-and-mortar stores and more consumers with easy non-Internet means of tax avoidance.

Number of Pages in PDF File: 63

Keywords: Commodity Taxation, Fiscal Competition, e-Commerce, Tax Havens, Tax Evasion

JEL Classification: H25, H71, H73, L81, R50

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Date posted: September 21, 2013 ; Last revised: August 10, 2014

Suggested Citation

Agrawal, David R., The Internet as a Tax Haven?: The Effect of the Internet on Tax Competition (August 2014). Available at SSRN: http://ssrn.com/abstract=2328479 or http://dx.doi.org/10.2139/ssrn.2328479

Contact Information

David Robert Agrawal (Contact Author)
University of Georgia - Department of Economics ( email )
Brooks Hall
310 Herty Drive
Athens, GA 30602-6269
United States
HOME PAGE: http://people.terry.uga.edu/dagrawal/
CESifo (Center for Economic Studies and Ifo Institute) ( email )
Poschinger Str. 5
Munich, DE-81679

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