Discussion Paper
No. 2014-19 | April 29, 2014
Xin Liu
Size Effect, Neighbour Effect and Peripheral Effect in Cross-Border Tax Games
(Published in Distance and Border Effects in Economics)


This paper analyses a game theoretic model of tax competition in a system where tax authorities are revenue optimisers and countries are differentiated by size. The model accommodates more than two countries. In equilibrium, larger countries set higher tax rates non-cooperatively. By applying the Hotelling linear model, this paper gives examples where the size effect, neighbourhood effect, and peripheral effect coexist and push up the tax rate in equilibrium.

JEL Classification:

H20, H71, H73, R51

Cite As

Xin Liu (2014). Size Effect, Neighbour Effect and Peripheral Effect in Cross-Border Tax Games. Economics Discussion Papers, No 2014-19, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2014-19

Comments and Questions

Anonymous - Referee report 1
June 04, 2014 - 12:02
The paper considers a model of commodity-tax competition in a world of asymmetric countries and cross-border shopping. I have two key issues with the paper as it currently stands. Firstly, its original scientific contribution in relation to the existing literature needs to be clarified in any revision. For example, in the third paragraph of the Conclusion, the author writes: "The two main findings from the first part of the paper are: country sizes are positively related to the countries' own tax rates; the sizes of the countries' tax rates are positively related to their neighbouring countries sizes as well as their own." As the author acknowledges, the first result here (larger countries impose higher taxes in equilibrium) is very well-established in the existing literature. Moreover, given that tax rates are invariably strategic complements in tax-competition models, the second result seems to follow immediately (and unsurprisingly) from the first: if a larger country imposes a higher tax, then its neighbours will react by increasing their own tax rates. My second (more minor) issue concerns the presentation of the paper, which is occasionally idiosyncratic -- for example, in the References list, where Zodrow and Mieszkowski (J of Urban Econs, 1986) appears twice.

Anonymous - Referee report 2
June 04, 2014 - 12:09
see attached file