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International Tax and Public Finance

Erschienen in:

01.04.2014

Revenue functions and Dupuit curves for indirect taxes with cross-border shopping

verfasst von: Jørgen Aasness, Odd Erik Nygård

Erschienen in: International Tax and Public Finance | Ausgabe 2/2014

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Abstract

Norway imposes some of the highest tax rates on alcoholic beverages and tobacco in the world, making, e.g., cross-border shopping an attractive activity for Norwegians. In light of this fact, we pose the question: Could we increase the total tax revenue from indirect taxes by decreasing tax rates on, e.g., spirits in Norway? When using an empirically based consumer model including cross-border shopping, tax-free shopping, and smuggling, we do find revenue curves implying total tax revenue maximizing tax rates. But we also find that these tax rates are always higher than the observed tax rates, i.e., suggesting that the answer to our question is no. In addition, we compare our results to a closed economy setting without cross-border shopping, etc. We find that the existence of cross-border shopping, etc. affects the shape of the revenue curves somewhat, although not dramatically.

Vorheriger Artikel The role of headquarters in multinational profit shifting strategies

Nächster Artikel Trade integration and corporate income tax differentials

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In Hindriks and Myles (2006), these curves are called Dupuit–Laffer curves.

With externalities or merit goods effects, this tax revenue maximizing tax rate could be higher or lower than the welfare maximizing tax rate. In this sense, where we are along the curve does not matter much from a traditional normative tax theoretical view. Nevertheless, being to the right of the maximum point of the Dupuit curve could imply significant political cost since so high tax rates could lose their legitimacy. In the long run, this would not be a good tax system and might be considered as an extra constraint on the optimal tax problem.

Although one could think of a situation in which we reduce the Norwegian price so much that it would be reasonable to think of cross-border shopping completely changing direction. Our model would then tend to underestimate the revenue effects.

Earlier versions of the model are documented in Aasness and Holtsmark (1993).

By level, we simply refer to the degree of aggregation in the utility tree. At the top-level, we find the total consumption, the next level (the second level) consists of Communication, Housing, Food/beverages and tobacco and Other goods and services. Next level consists of an even more dissaggregated level and so on, e.g., at level four spirits divides into spirits bought registered or unregistered.

All together the model consists of 59 groups.

The sources could be listed as: (i) Data on cross-border shopping compiled by Statistics Norway (SSB), covering a representative sample and collected by telephone interviewing; (ii) estimates of cross-border shopping compiled by the Swedish wine and spirits monopoly (Systembolaget) and Norwegian wine and spirits suppliers (VBF), based on comparisons of registered sales in different regions of Sweden; (iii) data on cross-border shopping, tax-free shopping, smuggling, etc. collected by the Norwegian Institute for Alcohol and Drug Research (SIRUS), together with data from the National Institute for Consumer Research (SIFO); (iv) data on unregistered tobacco consumption from the British American Tobacco Norway and the Norwegian Directorate for Health.

Adult and child elasticities tell us how much the demand changes when the number of adults/children changes.

This is not a crucial assumption. We have simulated with Engel elasticities being equal for both registered and unregistered purchases. The effect of this is mostly associated with a higher direct price elasticity for unregistered demands, such that increasing e.g. the price on tax-free will give slightly different quantitative results. The qualitative results remain unchanged.

These are interpreted as registered estimates on elasticities, conditional on the amount of cross-border shopping, etc. taking place.

Among other things, the roads are much better, cars are better and roomier, and shopping is more organized in the border regions (with modern shopping centers).

The value added tax system for 2007 consisted of three tax levels. A ordinary tax rate of 25 %, a reduced tax rate of 15 %, and a low tax rate of 8 %.

We use the following formula for each tax share: tax share in base year∗(1−a)+0.9∗a, where a is the parameter value appearing in the figure.

We have done the same simulations with total consumption unchanged in each case, which did not affect the shape of the curves in any significant way. The only noticeable difference is the level of tax revenue collected in the closed economy case.

We have also simulated for the partial revenue. This showed the same tendency for the closed case, indicating the existence of a maximum for spirits in the open economy while this does not exist in the closed economy.

We assume that the prices on alcoholic beverages are changed in the same proportions. Every price is normalized to 1 in the base year 2007.

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Titel: Revenue functions and Dupuit curves for indirect taxes with cross-border shopping
verfasst von: Jørgen Aasness
Odd Erik Nygård
Publikationsdatum: 01.04.2014
Verlag: Springer US
Erschienen in: International Tax and Public Finance / Ausgabe 2/2014
Print ISSN: 0927-5940
Elektronische ISSN: 1573-6970
DOI: https://doi.org/10.1007/s10797-013-9268-x

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