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)
I study the effect of broadband availability on local sales tax rates. High Internet penetration puts downward pressure on tax rates as jurisdictions seek to reduce revenue leakages to tax-free websites; but, taxable online sales will put upward pressure on tax rates because the Internet helps enforce sales tax collection. Exploiting state borders, I find that an increase in Internet penetration 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. A one standard deviation increase in Internet penetration lowers local tax rates by 16% of the average tax rate in large border towns of low-tax states. The negative effect of broadband availability is robust to using high-frequency panel data on sales tax rates and Internet subscriptions from 2003 to 2011.
Number of Pages in PDF File: 78
Keywords: Commodity Taxation, Fiscal Competition, e-Commerce, Tax Havens, Tax Evasion
JEL Classification: H25, H71, H73, L81, R50working papers series
Date posted: September 21, 2013 ; Last revised: January 25, 2015
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