DP4470 Horizontal and Vertical Indirect Tax Competition: Theory and Some Evidence From the USA

Author(s): Michael P. Devereux , Ben Lockwood , Michela Redoano

Publication Date: July 2004

Keyword(s): tax competitions , excise taxes , cross-border shopping , smuggling

JEL(s): H70 , H71 , H77

Programme Areas: Public Policy

Link to this Page: www.cepr.org/pubs/dps/DP4470.asp

This Paper provides a simple theoretical framework for analysing simultaneous vertical and horizontal competition in excise taxes, and estimates equations informed by the theory on a panel of US 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 neighbouring 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.