Exports to Smuggle and Smuggling Technologies*

Our analysis is motivated by cases of cigarette smuggling in Canada and in the UK. In the 1990s, domestic cigarettes were legally exported to be subsequently illegally imported. At first, smuggling was done by individual consumers who bought cigarettes abroad and brought them back through policed points of entry. This Mom and Pop smuggling was a mechanism to implement a second‐degree price discrimination scheme by cigarette manufacturers. Regrets from committing tax evasion and labels on exported cigarettes packs permit vertical differentiation of illegal and legal cigarettes. Paradoxically, labeling measures can make illegal sales more resilient to tax reductions, and stricter border enforcement encourages a switch to a less benign smuggling technology exclusive to criminal organizations. High export taxes terminated export‐to‐smuggle schemes, but brought about a surge of counterfeit cigarettes. Because of a second‐degree price discrimination scheme, the elimination of taxes need not suffice to eradicate smuggling.     

Cutting through the smoke: separating the effect of price on smoking initiation,relapse and cessation

I employ a large national representative dataset (Current Population Survey-Tobacco Use Supplements) to investigate how cigarette prices affect smoking decisions. A standard econometric approach is to estimate the relationship between cigarette prices and smoking participation at a point in time. I extend this approach to model past-year decisions to start, resume or quit smoking. Considering reverse causality, I apply an instrumental variable (excise taxes) for cigarette prices. I include an index of state-level anti-smoking sentiment to control for omitted variable bias. After estimating separate models for smoking initiation, relapse and cessation and for different age groups, I find no evidence that increasing taxes on cigarettes can prevent the onset of youth smoking. Neither does it effectively induce young smokers to quit. However, cigarette prices do play an important role to prevent relapse and encourage quitting at older ages.     

YOUTH ALCOHOL USE AND PUBLIC POLICY

This paper examines the frequencies of youth drinking and heavy drinking in 1982 and 1989 and separately examines the effects of minimum legal drinking ages and beer excise taxes for each year. In both years, drinking is responsive to price changes resulting from higher excise taxes. However, the price sensitivity of youth alcohol use fell after states changed to a uniform minimum legal drinking age of 21 .     

Excise taxes,over-shifting,cross-elasticity,and tax revenue

This article examines cross-elasticity effects in excise taxation for markets characterized by monopolistic competition and over-shifting. Extending the constant elasticity demand model to consider cross-elasticity leads to notably different results regarding tax revenue maximization. With nonzero but weak cross-elasticity effects relative to the price elasticity, we derive a higher optimal tax-price ratio compared to prior research. With strong cross-elasticity, revenue can continually be increased by raising the excise tax. Overall, the study offers government greater incentive to use excise taxes to obtain revenue.     

Effect of generic cigarettes on US cigarette demand and smuggling

This paper examines the effects of generic cigarettes on overall cigarette demand and smuggling, and studies influences of casual and organized smuggling for the United States. Generic cigarettes lower the price elasticity and diminish the effect of formal smuggling.     

The CBI Industrial Trends Survey — A Statistical Note

As the high tariff barriers of the inter-war period have been gradually reduced over the past twenty years, non-tariff factors have taken on an increasingly important role. One of the more notable of these factors is a country's level of excise taxes. Since these taxes are applied to both imports and domestic production, it is obvious that a given percentage change in excise taxes will have a smaller influence on trade than an equal percentage change in tariffs. Nevertheless, excise takes can be used to some extend as a substitution for tariffs. Hence, it would seem desirable to determine the degree to which such substitution will affect the volume of imports.

The role of taxes and tariffs in trade models has been considered in a number of theoretical discussions. ^{1 1} The effects of commodity taxes on the terms of trade and on domestic welfare have been analysed by MUNDELL, (1960), and by FRIEDLAENDER and VANDENDORPE (1968). However, virtually no effort has been made to examine the relationships among excise taxes, tariffs and imports in order to determine the extent to which countries can use excise taxes as a device to counterbalance the movement toward freer trade through the aegis of G.A.T.T. This study will attempt to rectify this omission.     

The simple analytics of tobacco taxation with illegal supply

This paper examines the impact of tobacco excise taxes where legal and illegal supplies coexist. The government's objective is to minimize cigarettes smoked in the economy (or to maximize revenue or to minimize illegal activity). It reacts to a competitive illegal supply in an adjoining jurisdiction. A model of consumer choice is used to demonstrate how demand response to tax changes can yield counterintuitive results. While the model mimics the Canadian market, similar situations characterize the US and European markets. A novel element of the paper is the treatment of externalities on the supply side rather than the demand side.     

The effectiveness of gasoline taxation to manage air pollution

Higher gasoline taxes can be justified because cars cause significant local, regional, and global air pollution damages. This study examines whether charging higher taxes would result in significant emission reductions. Both experimental survey data and actual behavior in Southern California and Connecticut are evaluated to explore whether people would change their driving behavior in response to higher gasoline prices. Both sets of results reveal that drivers are price inelastic in the short run (−0.4 to −0.6) and long run (−0.5 to −0.7). Imposing environmental surcharges on gasoline will result in only a small reduction in driving and thus only a small improvement in the environment. Such taxes will place a heavy and clear burden on drivers, however, making gasoline taxes extremely unpopular. Finally, the study finds that the income elasticity of gasoline is low (0.1–0.2) so that the gas tax will fall heavily on the poor.     

Vertical externalities in tax setting: evidence from gasoline and cigarettes

A common feature of federal systems is that tax bases are joint property. Consequently, state and federal tax setting decisions are interdependent. Our aim here is to put forward a rudimentary theoretical analysis of this phenomenon, and to use the theory as a framework for econometrically estimating the magnitude of the responses. We find that when the federal government increases taxes, there is a significant positive response of state taxes. For example, a 10-cent per gallon increase in the federal tax rate on gasoline leads to a 3.2-cent increase in the state tax rate.     

On the determinants of optimal border enforcement

We extend the current immigration-enforcement literature by incorporating both the practice of people smuggling and a role for non-wage income into a two-country, dynamic general equilibrium model. We use the model economy to examine three questions. First, how does technological progress in the smuggling industry affect the level of migration and capital accumulation for a given level of enforcement? Second, do changes in border enforcement affect the level of migration, capital accumulation, and smuggling activity? Third, is the optimal level of enforcement sensitive to technological progress in the smuggling industry? We show that the government chooses to devote resources to border enforcement only if the deterrent effect on smugglers is large enough. Otherwise, it is not worth taxing host-country natives as the taxes paid will more than offset any income gain resulting from fewer migrants.     

CAN SOFT DRINK TAXES REDUCE POPULATION WEIGHT?

Soft drink consumption has been hypothesized as one of the major factors in the growing rates of obesity in the United States. Nearly two-thirds of all states currently tax soft drinks using excise taxes, sales taxes, or special exceptions to food exemptions from sales taxes to reduce consumption of this product, raise revenue, and improve public health. In this paper, we evaluate the impact of changes in state soft drink taxes on body mass index (BMI), obesity, and overweight. Our results suggest that soft drink taxes influence BMI, but that the impact is small in magnitude. ( JEL I18, H75)     

Globalisation, capital mobility and tax competition: theory and evidence for OECD countries

Are the predictions of tax competition theory wrong? While the tax competition literature predicts that taxes on income from capital decrease with increasing globalisation, past empirical studies on various data find contradicting evidence. By using different data and additional elements of economic theory, this paper aims to challenge the empirical contributions. For a panel of 14 OECD countries and for the period 1967–1996, we find that globalisation has indeed a negative and significant impact on corporate taxes. Furthermore, globalisation tends to raise labour taxes and social expenditures. As a consequence, the so-called “efficiency” and “compensation” hypotheses of globalisation are not competing, but rather, both appear to apply at the same time. Efficiency has an impact on the tax-mix, whereas compensation is provided through increased social expenditures.     

Public Goods and Tax Competition in a Two‐Sided Market

A rather neglected issue in the tax competition literature is the dependence of equilibrium outcomes on the presence of firms and shoppers (two‐sided markets). Making use of a model of vertical and horizontal differentiation, within which jurisdictions compete by providing public goods and levying taxes in order to attract firms and shoppers, this paper characterizes the noncooperative equilibrium. It also evaluates the welfare implications for the jurisdictions of a popular policy of tax coordination: The imposition of a minimum tax. It is shown that the interaction of the two markets affects the intensity of tax competition and the degree of optimal vertical differentiation chosen by the competing jurisdictions. Though the noncooperative equilibrium is, as it is typically the case, inefficient such inefficiency is mitigated by the strength of the interaction in the two markets. A minimum tax policy is shown to be effective when the strength of the interaction is weak and ineffective when it is strong.     

Rational choice and the taxation of sin

The traditional literature on sumptuary taxation indicates that these taxes are the results of a majority of individuals imposing their moral code upon consumers of goods that are thought to be undesirable. Undoubtedly, this explanation is not trivial, and accounts for the existence of some of the present sumptuary taxes. This paper has developed a choice model of sumptuary taxes based on a wealth-maximization assumption that illustrates the possibility that an individual could approve of an excise tax on a good that he consumes.     

Optimal taxation of car ownership, car use and public transport: Insights derived from a discrete choice numerical optimization model

We formulated and numerically evaluated a model of car ownership, car use and public transport use for peak and off-peak hours of the day. The model was used to study the optimal tax structure for passenger transport in Belgium, with special emphasis on the optimal tax treatment of diesel versus gasoline cars. We obtained a number of interesting results. First, if the government can set all fixed and variable transport taxes optimally, the higher marginal external cost of diesel use implies that the optimal tax per kilometre for the use of a diesel car is higher than for the use of a gasoline car. Moreover, high congestion implies that the taxes on car use in the peak period are more than twice their current levels. However, the optimal tax on ownership of a diesel car is some 200€ below its current level. Second, if the government uses kilometre taxes that do not differentiate between fuel types, the optimal ownership tax on a diesel car is twice as high as the tax on a gasoline car. Furthermore, if political constraints restrict user taxes to their current levels, we find that optimal ownership taxes on diesel cars double, whereas those on gasoline cars rise by 30%. Finally, subsidies to public transport are found to be optimal as long as variable car taxes are not differentiated between periods.     

Vertical versus horizontal tax externalities: An empirical test

We study taxation externalities in federations of benevolent governments. Where different hierarchical government levels tax the same base, one can observe two types of externalities: a horizontal externality, working among governments of the same level and leading to tax rates that are too low compared to the social optimum; and a vertical externality, working between different levels of government and leading to suboptimally high tax rates. Building on the model of Keen and Kotsogiannis [Keen, Michael J., Kotsogiannis, Christos, 2002. Does federalism lead to excessively high taxes? American Economic Review 92 (1) 363–370], we derive a discriminating hypothesis to distinguish vertical and horizontal tax externalities based on measurable variables. This test is applied to a panel data set on local taxes in a sample of Swiss municipalities that feature direct-democratic fiscal decision making, so as to maximize the correspondence with the “benevolent” governments of the theory. We find that vertical externalities dominate – they are thus an observed empirical phenomenon as well as a notable extension to the theory of tax competition.     

Taxation and market power when products are durable

Empirical studies suggest that industries hardest hit by government regulations, such as pollution regulations, are both highly concentrated and manufacture durable products. We analyze a two-period durable goods monopoly model where the firm faces government restrictions in the form of pollution or excise taxes. In contrast to non-durable monopolistic industries, we show that taxes on pollution or an excise tax on output may increase a durable goods monopolist's commitment ability and market power. Indeed, any policy which restricts future output may have the perverse effect of increasing a monopolist's bargaining power with buyers and enhance their profits.The authors would like to thank several anonymous referees and the editor for helpful comments and suggestions on earlier drafts of the paper. Of course, any remaining errors are the sole responsibility of the authors.     

Coverage of Entrepreneurship in Principles of Economics Textbooks: An Update

The authors present an example of the effect a change in the excise tax can have on retail gasoline prices. The findings provide support for standard economic theory, as well as provide a vehicle for illustrating some of the subtleties of the analysis, including the implicit assumptions regarding the implications for the buying and selling prices of middlemen.     

Economic instruments and the environmental accounts

The Nordic countries have now had experience with environmental taxes and subsidies as a major component of their environmental policy over an extensive period of time. The Swedish System of Environmental and Economic Accounts (SEEA) include environmental taxes and subsidies as part of the official statistics. This article presents the accounts for taxes and subsidies, linked to the accounts for emissions data by industry. It demonstrates disparities between emissions and environmental taxes, as well as where industries or environmental problems are not regulated. The data show that in Sweden economic instruments are always aimed at particular actors or areas, and are never quite as comprehensive as recommended by economic theory. The environmental taxes are primarily aimed at fossil fuel use and related emissions, and have been mostly applied to the household sector and services sector, while industry often has been given exemptions due to concerns about international competition. The environmentally motivated subsidies are mainly directed to agriculture, fishing and research on renewable resources. A fully developed international data set on taxes and subsidies would provide a sound base for comparing the impact on international competitiveness. Eurostat is promoting the use of environmental accounts data for its member countries by harmonizing methods and engaging in publication of international comparisons.     

The effects of vertical and horizontal incentives on local tax efforts: evidence from China

Tax effort is a measure of a government’s effort to collect taxes. This study explores what impacts both vertical and horizontal incentives have on local governments’ tax efforts in China. For consistency with the literature, we first include typical economic and institutional factors in our analysis. We find that the effects of economic factors on local tax efforts are significant, but the effects of institutional factors tend to be weak. Fiscal decentralization, as a vertical incentive, has a significantly positive effect on tax efforts at the provincial level. Meanwhile, fiscal interaction, as a horizontal incentive, is also taken into account in a spatial specification to explain tax competition among local governments. The results show that local tax effort in China also depends on the horizontal incentive. Hence, to improve local tax effort, the central government should let the locals have more autonomy in collecting taxes and evaluate local tax effort by referring to tax collection in adjacent provinces simultaneously.