The Internet as a Tax Haven? The Effect of the Internet on Tax Competition
David R. Agrawal
University of Kentucky - James W. Martin School of Public Policy and Administration; University of Kentucky - 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 leakage to tax-free sales; but, taxable online sales will put upward pressure on tax rates because the Internet helps enforce sales tax collection. Exploiting discontinuities at borders, I find that an increase in Internet penetration induces large municipalities on the low-state-tax side of state borders to lower their local tax rates by more than municipalities on the high-state-tax side; this result is consistent with towns on the high-tax side having more consumers with easy non-Internet means of tax avoidance (cross-border shopping). I then use panel data on all local sales tax rates in the country and changes in Internet subscription rates to show that the effect of Internet penetration changes is negative.
Number of Pages in PDF File: 79
Keywords: Commodity Taxation, Fiscal Competition, e-Commerce, Tax Havens, Tax Evasion
JEL Classification: H25, H71, H73, L81, R50
Date posted: September 21, 2013 ; Last revised: May 25, 2015
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