Tax competition on the extensive and intensive margins 

Abstract

Tax administration is costly and may discourage some governments from utilizing certain taxes, this becoming tax havens. This paper develops a tax competition model in which jurisdictions first decide whether or not to levy a tax rate and then decide what tax rate to set to competefor mobile shoppers. We address the following questions: (i) How is the equilibrium tax ratedetermined when taxing jurisdictions can decide to become tax havens? (ii) How do tax rate and number of tax havens differ when taxes are chosen competitively compared to when they are set by a social planner? We show that when the equilibrium number of tax havens is low [high], a positive? Scal externality dominates [is dominated by] a negative consumption externality, the equilibrium tax rate is lower [larger] and the number of tax havens is larger [lower] than in a social planner equilibrium. Using a dataset of US counties, the model is estimated structurally. We show that the tax rates are around 11% too low and the number of tax havens is up to 17% too high compared to the social optimum.