Tax competition, tax coordination, and e-commerce

This paper contributes to the political debate on commodity tax coordination in Europe. It examines, within Nielsen's setting, the impact of online shopping on taxes and tax competition and contrasts destination-based taxation with origin-based taxation. Heterogeneous consumers surf the Internet at a cost. It is assumed that fiscal leakage occurs during transactions on the Internet either because of tax evasion or of the existence of a tax liability threshold. Whereas cross-border shopping effectively results in taxes being levied at origin, this model by adding e-commerce shows that taxing online trade based on the origin principle softens tax competition and allows sustaining the destination principle on brick-and-mortar shops. Tax competition is reduced if tax is origin-based, because the Internet helps the small country expand its tax base, which induces tax convergence.