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

Abstract

If online transactions are tax-free, increased online shopping may lower tax rates as jurisdictions seek to reduce tax avoidance; but, if online firms remit taxes, online sales may put upward pressure on tax rates because the internet enforces destination-based taxes. I find that higher internet penetration results in lower municipal tax rates on average, but raises tax rates in some jurisdictions. The latter effect emerges in states where many online vendors remit taxes. A one standard deviation increase in internet penetration lowers local sales taxes in large municipalities by 0.20 percentage points or 17% of the average rate.

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

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