Over the Borderline: How the Characteristics of Lines Shape Optimal Tax Policy

Abstract

"Lines" in the tax system are demarcations of goods into different tax rate categories; tax rates may change discontinuously at a line. Geographic borders are a specific example of a line in the tax system. Using the example of geographic borders, I demonstrate how the permeability of the line (how susceptible it is to tax-driven product innovation) and how the ability of the tax authority to reduce tax evasion across lines are determinants of optimal tax policy.

Keywords: Commodity Taxation, Optimal Tax Systems, Lines, Borders

JEL Classification: H21, H25, H77, R12