Tax Competition on the Extensive and Intensive Margins

75 Pages Posted: 4 Mar 2022

See all articles by David R. Agrawal

David R. Agrawal

University of Kentucky - James W. Martin School of Public Policy and Administration; CESifo (Center for Economic Studies and Ifo Institute)

Tidiane Ly

Syracuse University

Raphael Parchet

Università della Svizzera italiana, Institute of Economics (IdEP)

Date Written: January 2022

Abstract

Tax administration is costly and may discourage some governments from utilizing certain taxes, thus becoming tax havens on those particular tax bases. This paper studies the welfare implications of strategic tax setting in the presence of such zero-tax jurisdictions. We develop a tax competition model in which jurisdictions first decide whether or not to levy a tax and then decide the optimal tax rate to compete for mobile factors. We compare the competitive equilibrium to the tax rates that a central (federal) planner would set. We show that decentralized tax rates can be too low or too high depending on the number of non-adopting jurisdictions. Surprisingly, taxes are too low if the number of non-adopting jurisdictions is low and too high if the number of non-adopting jurisdictions is high. We apply our model to U.S. county sales taxes where 40% of jurisdictions do not levy a sales tax. We find that tax rates are up to 17% too low and the number of non-adopting jurisdictions is up to 28% too high compared to the social optimum.

Keywords: Tax competition, Tax havens, Commodity taxes, Public goods, Tax administration

JEL Classification: H71, H72, R50, R51

Suggested Citation

Agrawal, David R. and Ly, Tidiane and Parchet, Raphael, Tax Competition on the Extensive and Intensive Margins (January 2022). Available at SSRN: https://ssrn.com/abstract=4009935

David R. Agrawal (Contact Author)

University of Kentucky - James W. Martin School of Public Policy and Administration ( email )

433 Patterson Office Tower
Lexington, KY 40506-0027
United States
859-257-8608 (Phone)

HOME PAGE: http://www.uky.edu/~drag222/

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.uky.edu/~drag222/

Tidiane Ly

Syracuse University ( email )

Syracuse, NY 13244
United States

Raphael Parchet

Università della Svizzera italiana, Institute of Economics (IdEP) ( email )

Via Buffi 13
CH-6900 Lugano
Switzerland

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