Horizontal and vertical indirect tax competition: Theory and some evidence from the USA

This paper provides a simple but general theoretical framework for analyzing simultaneous vertical and horizontal competition in excise taxes, which includes several previous contributions as special cases. It allows for both elastic individual demand for the taxed good, and cross-border shopping (and smuggling). It then estimates equations informed by the theory on a panel of US state and federal excise taxes on cigarettes and gasoline. The results are generally consistent with the theory, when the characteristics of the markets for the goods are taken into account. Taxes in neighboring states have a significant and large effect in the case of cigarettes. The possibility of smuggling cigarettes from low tax states also plays a role. In the case of gasoline, taxes in neighboring states do not play a significant role; however, there is evidence in this case of vertical competition.     

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.     

Smoke screen: Estimating the tax pass‐through to cigarette prices in Pakistan

This article estimates and compares the speed and magnitude of the tax pass‐through across major cigarette brands at different price points (budget, mainstream, and premium) in Pakistan by using a novel dataset of monthly observations on cigarette prices in 50 cities during the period 2004 to 2015. The empirical analysis indicates that the pass‐through of cigarette taxes to the final consumer price is fast but incomplete in Pakistan. The pass‐through coefficient is estimated to be in the range of 70 to over 90 percent across four major cigarette brands, and most of the pass‐through occurs contemporaneously within a period of 2 months. The results imply that a 1‐Pakistan rupee (PR ) increase in taxation leads to an increase of PR s 0.8, on average, in cigarette prices. In other words, cigarette taxes are undershifted to consumers in Pakistan. With respect to the tax pass‐through at different price tiers (budget, mainstream, and premium), I find significant variation in the pass‐through coefficient, which is close to one for the premium cigarette brand and significantly lower for the budget and mainstream cigarette brands.     

Border tax adjustments and tariff‐tax reforms with consumption pollution

We develop a model of a small open economy, where pollution per unit of consumption between domestically produced and imported quantities of the same good differs. We show that the first‐best policy combination calls for consumption taxes on all polluting goods, and border tax adjustment (BTA) measures, that is, tariffs or import subsidies. We identify conditions under which well‐known tariff‐tax reform policies for developing economies, such as a consumer‐price‐neutral piecemeal reform of trade and a consumption tax, and a consumer‐price‐neutral reform of all trade and consumption taxes improve welfare. We also evaluate whether reforms of trade taxes alone are superior to consumer‐price‐neutral reforms of trade and consumption taxes.     

Political Commodities and Sovereignty Management: Cigarette Smuggling across Brazil’s Southern Borders

Cigarette smuggling across Brazil’s borders with Paraguay, Uruguay and Argentina involves large amounts of merchandise and money. The public in Brazil associates this activity with images of war, contamination and other threats to state sovereignty. This article assesses the political meaning and uses of smuggling in order to challenge the assumption that smuggling threatens the sovereignty of the Brazilian state. With the help of a literature review, fieldwork at the border, interviews with practitioners, a cartographic analysis of news coverage of seizures, the tobacco production and consumption, the market and its regulation, actors, routes and networks were mapped and analysed. In the Southern Cone of South America, an integrated transborder territory emerges where tobacco is cultivated, prepared and distributed, and cigarettes are manufactured, transported, sold and smoked. These flows cross distinct legal framings and lead to an increase in danger and profit. Thus, the market is segmented between national legal products and imported cigarettes that are cheaper and illegal but easily obtainable. The concepts of political commodities understood as the acts of powerful agents who barter advantages related to their authority and sovereignty management, understood as the use of legal (state-managed) structures according to private interests at different scale levels, provide useful theoretical tools to examine the territorialisation of the cigarette smuggling and its control by the state and private agents. We conclude that tobacco production and trade, as well as cigarette smuggling, are connected via agents who use the border to build the legal market and, consequently, to increase the trade value of national tobacco. Cigarette smuggling across the state borders of the Southern Cone combines networks and places in such a way that is integrated into the legal economy and the national territories, and it does not defy state’s sovereignty.     

Should the Carbon Price Be the Same in All Countries?

International differences in fuel taxation are huge, and may be justified by different local negative externalities that taxes must correct, as well as by different preferences for public spending. In this context, should a worldwide uniform carbon tax be added to these local taxes to correct the global warming externality? We address this question in a second best framework à la Ramsey, where public goods have to be financed through distortionary taxation and the cost of public funds has to be weighted against the utility of public goods. We show that when lump‐sum transfers between countries are allowed for, the second best tax on the polluting good may be decomposed into three parts: one, country‐specific, dealing with the local negative externality, a second one, country‐specific, dealing with the cost of levying public funds, and a third one, global, dealing with the global externality and which can be interpreted as the carbon price. Our main contribution is to show that the uniformity of the carbon price should still hold in this second best framework. Nevertheless, if lump‐sum transfers between governments are impossible to implement, international differentiation of the carbon price is the only way to take care of equity concerns.     

A Discriminatory Mechanism to Reduce Urban Congestion

In this article, we propose an optimal mechanism to reduce congestion when information is asymmetric. Each car driver receives a quantity of traffic rights such that his adjusted marginal benefit is equal to the marginal cost of congestion and payments are based on willingness to pay. We show that the level of congestion achieved is lower and each car user can receive more or fewer rights than under complete information. With symmetric beliefs, the payment rule results from a second‐degree price discrimination. When beliefs are asymmetric, it results simultaneously from a second‐degree price discrimination and from a third‐degree price discrimination and high willingness‐to‐pay car users are discriminated against. The revenue raised can be used to reduce distortionary taxes, thereby gaining public acceptability.     

Revenue-increasing and welfare-enhancing reform of taxes on exports

The loss of revenue from a reduction in export taxes has been a concern for trade policy reform in many developing countries. We discuss a strategy for selective reform of taxes on exports that enhances welfare and increases revenue. The strategy involves a reduction in the export tax on a given commodity with an offsetting increase in production tax to keep the producer price unchanged. This strategy is especially promising for exportables with a net subsidy on domestic consumption due to high export taxes and low consumption taxes.     

Tax Principles and Coordination of Trade and Domestic Policies Under Imperfect Competition

We construct an exporting monopoly model to compare destination‐ and origin‐based commodity taxes in a context of a trade and domestic tax reform. We show that an export tax reduction and a change in destination (resp. origin) tax that fix the world price is strictly Pareto‐improving (resp. deteriorating), which holds whether markets are integrated or segmented. This result may provide a new rationale for preferring the destination‐based consumption tax to the origin‐based production tax that has been discussed in the literature of tax harmonisation and tax competition.     

Heterogeneity and the evaluation of efficiency: the case of Italian universities

This study investigates the quarterly relationship between the quantity of cigarettes sold, real disposable income per capita, and the relative price level of cigarettes in Canada. Careful attention is paid to the nonstationarity of the data and the dynamic specification of the model. It is concluded that cigarette demand is extremely insensitive to price and income changes. This is evidence of the large consumer surplus smokers enjoy and the large revenue increasing potential of a cigarette tax increase policy, as opposed to cigarette bans.     

Some Taxation Theorems in the Hotelling Model

In this paper, we investigate the relationship between the demand ad valorem, cost ad valorem and unit taxes in terms of price, quantity and tax revenue. In particular, we prove that the Musgravian transformation holds in the Hotelling model. In addition, we show that the Suits‐Musgrave theorem must be revised as output in the Hotelling model remains invariant in the presence of different taxes. That is, for a given price instead of a given output, the tax revenue under demand ad valorem tax exceeds that under the corresponding unit tax as long as profit levels for both stores are positive, a very general assumption. The exception is when the two stores are located close to each other and transportation cost is zero. Only in this case, are tax revenues and price under both tax regimes the same. If both stores are symmetrically located, the superiority of the ad valorem tax holds true except when the two stores are located back to back. Finally the farther away the location of a firm from the end point is, the smaller the difference in tax revenues between demand ad valorem and unit tax will be: the effect of the Suits‐Musgrave theorem weakens in the presence of location clustering.     

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.     

Strategic Environmental Policies when Waste Products are Tradable

The paper deals with international trade in hazardous waste products when there is an international oligopoly market for waste, and both waste‐importing and waste‐exporting countries act strategically to utilize national environmental policies to attach rents arising from trade in waste. The authors model a multiple‐stage game where waste is generated in an industrialized country as a byproduct of production, and potentially is exported to some less‐developed countries, if not abated locally, or imposed on local residents at a cost of an environmental tax. In the market for waste, an oligopolistic supply is assumed. The demand for waste is perfectly competitive, with waste‐processing firms guided by marginal disposal costs and environmental taxes levied by foreign countries. With each country playing Nash, the analysis finds domestic and foreign taxes to be distorted from the Pigouvian taxes in such a way that the domestic (waste‐exporter) tax rate is set below, and the foreign tax rate is set above, the Pigouvian taxes. However, a global welfare optimum requires tax distortions in the opposite direction, in the sense that foreign environmental taxes must be set below the Pigouvian tax rate.     

Trade Policies for Exporting Industries under Free Entry

This paper computes optimal export taxes and domestic production subsidies for exporting industries under free entry. We show that domestic welfare is not at maximum, as is typically believed, when the export price is a monopoly price, and the domestic price is a competitive price, because a market structure effect has to be taken into account. Furthermore, we show that the optimal tax/subsidy formulas for an oligopoly coincide with those under perfect competition, if foreign and domestic demand functions are both linear. We also discuss optimal trade policies when only one instrument is available, and we run numerical simulations to determine and compare optimal trade taxes under endogenous and exogenous market structures.     

Federal excise tax increase and its effects on U.S. tobacco production

Using the equilibrium displacement model, we examine the impact on tobacco farms of the decrease in cigarette sales due to the increase in prices induced by the federal excise tax hike that went to effect on April 1, 2009. First we estimate the effect of the increase in the federal excise tax on cigarette price and sales. Then, we estimate the effect of the decrease in cigarette sales on tobacco farms. Results suggest that under a scenario of market power implied by a conjectural elasticity of 0.11 manufactures could charge $0.23 per pack more than the federal excise tax increase, which would be enough to offset the estimated 1.42 billion-pack sales decline and to maintain the industry’s revenue net of taxes. This decrease in cigarette sales induced by the increase in the federal excise tax would result in the tobacco leaf output and price declining by 2.85 and 0.41%, respectively. As a result, the tobacco leaf sector would sustain a loss of 3.25% in revenue, amounting to nearly $48.4 million.     

Optimal Commodity Taxes in Australia

The recent changes to commodity taxes in Australia have led to renewed interest in a classic question in public finance: should the tax rates be uniform or differentiated? This article attempts to answer this question by calculating optimal commodity taxes in Australia for a nine‐item disaggregation. The estimates point to non‐uniform commodity taxes, even from the viewpoint of an inequality‐insensitive tax planner. The optimal commodity taxes bear little resemblance with the pre‐GST or post‐GST tax rates. No less significant is our observation that even the purely efficiency‐driven optimal commodity taxes imply lower real expenditure inequality than the actual taxes.     

Illegal trade in the Iranian economy: Evidence from a structural model

This study investigates the causes and consequences of import and export smuggling and estimates its relative size in Iran from 1970 to 2002. Multiple Indicators–Multiple Causes (MIMIC) modeling and trade misinvoicing are used to compute the latent variable of smuggling. The results indicate that the penalty rate for smuggling and the quality of economic and political institutions reduce smuggling, while tariffs and black market premia increase the incentives for illegal trade. More trade openness is associated with greater illegal trade in the case of Iran. On average, smuggling in Iran has been approximately 13% of total trade.     

Ecological dumping under foreign investment quotas

In this paper, we examine the discrimination of emission taxes between the export and nontradable sectors in a small open economy. A few articles indicate that there should be no differentiation of environmental policies between sectors in the economy if the government uses indirect instruments such as emission taxes. However, we show that discrimination of emission taxes may occur in an economy that imposes foreign investment quotas. In particular, the possibility that ecological dumping occurs is higher if export goods are more labor intensive than import goods (as in developing countries). Moreover, in the case where import goods are the most capital intensive, both emission tax rates may be lower than the marginal environmental damage, and ecological dumping may occur. It is also shown that easing foreign capital quotas may deteriorate the country’s welfare.     

A Model of Smuggling and Trafficking of Illegal Immigrants with a Host Country Policy

This paper deals with illegal immigration via two distinct activities—smuggling and trafficking of workers. A destination–source model determines economic pay‐offs and a standard labor market policy works as a deterrent. Tax paid by legal unskilled workers at the destination is determined endogenously and it finances inland monitoring against illegal immigration, holding the border patrol at a given level. The tax also finances unemployment benefit to legal workers at the destination. The number of immigrant smugglers and traffickers is also determined endogenously along with employer penalty and market wage for illegal immigrants. Higher unemployment benefits may reduce illegal wages, raise traffickers’ rent and reduce flow of illegal immigrants from the source countries.     

Tax rebating of exports and the balance of payments

Tax rebating has recently been given heavy emphasis as a means of improving a country's balance of payments and recommendations have been made for the substitution of taxes that are fully rebated on exports for taxes that are only partly rebated or are not rebated at all. This paper gives the conditions under which tax rebating would improve a country's balance of payments. It shows that whether tax rebating of exports improves the balance of payments or not depends upon the size of the price elasticity and of the import component of exports. It then shows that, with the available evidence concerning the size of the price elasticities and of the import components in a number of European countries, export rebating may harm rather than improve their balances of payments.