Thread by @DavidRAgrawal

"Technology and Tax Systems" (w/ David Wildasin) is forthcoming in the Journal of Public Economics. Technological change simultaneously influences mobility and enforcement of tax bases, redistributing tax revenues from high-tax to low-tax jurisdictions.

Thread on the paper:
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Some history: Analogous to online shopping today, new technologies such as refrigeration and the automobile led to large chain stores, which prompted concerns that that large chain stores were driving out small businesses. States responded by creating new taxes.
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More recently, the internet has also threatened mom and pop stores. By effectively acting as a “tax haven”, many policymakers have worried about the decline of retail sales taxes in the USA.
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But, with appropriate policy reforms, could these revenue leakages from the internet turn to revenue gains if the internet enhances enforcement by shifting tax compliance from individuals to large online vendors that are easily monitored?
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Technological changes affect fiscal policy in multiple ways
1.Reduce transaction costs that increase mobility of the base (globalization, transportation networks)
2.Shift some of the tax base to more easily monitored transactions (computer auditing, electronic reporting)
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We explore these two mechanisms on equilibrium tax rates and revenues in a model that explicitly takes into account the implications of e-commerce. A priori, there is no reason to expect that these changes should affect all jurisdictions in the same way because…
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1.Internet transactions allow people to buy goods from sellers “virtually” anywhere in the world
2.Given recent institutional reforms, the internet allows governments to monitor and tax purchases made by their residents from remote vendors
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In the presence of retail agglomerations, effects operate differently in various places. The first mechanism limits the revenue raising capacity of jurisdictions where consumption purchases are concentrated, while the second mechanism expands the taxing capacity of others
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The model specifics:
-Initially standard tax competition model where goods are initially taxed where vendors are located.
-In this standard model: all jurisdictions – both large and small – lower their tax rates as the cost of cross-border shopping falls.
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How we extend model:
a. Allow for local or regional specializations in the availability of heterogeneous commodities (such as shopping malls).
b. Allow some goods to be able to be purchased online.
The relative cost of cross-border shopping and e-commerce is critical.
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Although cross-border shopping remains taxed on an origin basis, e-commerce is assumed to be taxed where the buyer resides. This is consistent with recent U.S. court rulings (SD v. Wayfair) and EU directives.
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Then, we ask: what happens to tax rates and revenues when the cost of online shopping (technological change) falls relative to the cost of cross-border shopping?
With important implications for tech change more generally on other tax instruments….
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Traditionally, falling transaction costs reduce tax rates for all. However, we find that a decline in the cost of e-commerce affects competing governments in *different* directions. Tax rates and revenues *fall* in large jurisdictions, but *rise* in small jurisdictions.
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The combined tax revenues of large and small jurisdictions decrease as the cost of e-commerce declines. This result arises because technology and enforcement of taxes shifts the tax base from the high-tax city to the low-tax suburb.
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Returning to mechanism: the decline of taxes in cities is a result of mobility of the base. The increase in tax rates in small towns is a result of the internet shifting transactions to a more readily monitored tax base, which benefits places w/ initially less activity.
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The results can be generalized by allowing for many commodity types with complex trade patterns, different transaction costs for different commodities, imperfect enforcement, and differentiated tax treatment. This allows for more applications, including international trade.
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We also adapt the model to study taxes on business incomes. Firms may avoid high taxes: first, by using costly profit shifting to jurisdictions that offer more favorable tax treatment, or second, by relocating productive business activities to lower-tax jurisdictions.
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Technological change reduces the costs of tax avoidance. Reductions in the cost of business relocation may increase equilibrium tax rates and tax revenues for some low-tax jurisdictions, even as they put downward pressure on the taxes of high-tax jurisdictions.
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As in the consumption tax case, these divergent results arise because technological change alters the spatial distribution of the portion of the tax base that can easily be monitored – facilitating tax enforcement for some, but not all, jurisdictions.
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Many other applications abound: technological change may facilitate labor mobility but may also allow governments to better track where and when people are working. We welcome hearing more examples/applications.
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#taxtwitter Paper is available here:
sciencedirect.com/science/articl…
Email for an ungated copy.
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Let me also note how great it has been to work with Dave Wildasin on this paper. I learned so much from him in the process.
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