A Simple Model of Commodity Taxation and Cross-Border Shopping

This paper sets up a simple model in which two countries, differing in geographical extent, engage in commodity tax competition originating in opportunities for cross-border shopping. The non-cooperative tax equilibrium and various coordination initiatives are examined in the benchmark model and in two model extensions incorporating (i) costs of transportation for goods and (ii) border inspection. Among the more surprising results are the following: with (i), pure profits accrue to sellers near the border, but subjecting them to tax may lower the country's total tax revenue; with (ii), the volume of cross-border shopping may well increase. Copyright 2001 by The editors of the Scandinavian Journal of Economics.