Horizontal and Vertical Indirect Tax Competition: Theory and Some Evidence from the USA

35 Pages Posted: 10 Aug 2004

See all articles by Michael P. Devereux

Michael P. Devereux

Centre for Business Taxation, Oxford University; CESifo (Center for Economic Studies and Ifo Institute); Institute for Fiscal Studies (IFS); Centre for Economic Policy Research (CEPR); University of Oxford - Said Business School; University of Oxford - Said Business School

Ben Lockwood

University of Warwick - Department of Economics; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute)

Michela Redoano

University of Warwick - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: July 2004

Abstract

This Paper provides a simple theoretical framework for analyzing simultaneous vertical and horizontal competition in excise taxes, and estimates equations informed by the theory on a panel of U.S. state and federal excise taxes on cigarettes and gasoline. We also examine the role played by smuggling. The results are generally consistent with the theory, when the characteristics of the markets for the goods are taken into account. For neither good do federal excise taxes affect state taxes. Taxes in neighboring states have a significant and large effect in the case of cigarettes, and a much weaker effect in the case of gasoline. We also find that in the setting of cigarette taxes, concerns about cross-border shopping play a more important role than concerns about smuggling.

Keywords: Tax competitions, excise taxes, cross-border shopping, smuggling

JEL Classification: H70, H71, H77

Suggested Citation

Devereux, Michael P. and Lockwood, Ben and Redoano, Michela, Horizontal and Vertical Indirect Tax Competition: Theory and Some Evidence from the USA (July 2004). CEPR Discussion Paper No. 4470. Available at SSRN: https://ssrn.com/abstract=574523

Michael P. Devereux (Contact Author)

Centre for Business Taxation, Oxford University ( email )

Said Business School
Park End Street
Oxford, OX1 1HP
United Kingdom
+44 1865 288507 (Phone)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Institute for Fiscal Studies (IFS) ( email )

7 Ridgmount Street
London, WC1E 7AE
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

Ben Lockwood

University of Warwick - Department of Economics ( email )

Coventry CV4 7AL
United Kingdom
+44 24 7652 8906 (Phone)
+44 24 7657 2548 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Michela Redoano

University of Warwick - Department of Economics ( email )

Coventry CV4 7AL
United Kingdom
+44 24 7652 3474 (Phone)
+44 24 7652 3032 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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