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.
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Notes
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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Acknowledgements
We gratefully acknowledge valuable comments from Vidar Christiansen, Terje Skjerpen, and Thor Olav Thoresen, anonymous referees, and Eckhard Janeba (editor of the journal). We also thank the Norwegian Research Council’s Tax Economics Programme for financial support.
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Appendix
Appendix
In this Appendix, we present the complete matrixes of elasticities in the base year. The model is calibrated to match direct price elasticities, so in this sense it reflects existing knowledge. In addition, the model gives us a complete set of elasticities, including cross-price elasticities, which we had less knowledge about prior to this study.
Note that the column sums in Tables 8–11 are zero. They are weighted sums of the elasticities which follow from the consumer’s budget constraint. Similarly, the row sums are all zero as a consequence of the demand functions being homogeneous of degree zero in prices and total expenditure. This shows that all are consistent with consumer theory and that no programming errors were made in the making of the model.
Note also that the cross-price elasticities are all positive in Tables 9 and 11. They are compensated elasticities, i.e., we imagine the consumer receiving income compensation such that the utility level stays the same after a price increase. Since the consumer goods are all substitutes, every compensated cross-price elasticity will be positive. In Tables 8 and 10, we have uncompensated elasticities, i.e., the consumer receives no income compensation and several of the cross-price elasticities become negative due to negative income effects. Nevertheless, some goods are sufficiently strong substitutes to make the substitution effect dominate and the cross-price elasticities end up as positive. In particular, we obtain positive uncompensated elasticities between every beverage with alcohol in both Tables 1 and 3. We also obtain positive uncompensated elasticities in Table 10 between goods of the same type, but depending on whether they are bought registered at home, cross-border shopped, tax-free shopped or smuggled.
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Aasness, J., Nygård, O.E. Revenue functions and Dupuit curves for indirect taxes with cross-border shopping. Int Tax Public Finance 21, 272–297 (2014). https://doi.org/10.1007/s10797-013-9268-x
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DOI: https://doi.org/10.1007/s10797-013-9268-x
Keywords
- Revenue functions
- Indirect taxes
- Excise taxes
- Alcohol
- Tobacco
- Cross-border shopping
- Smuggling
- Tax-free shopping
- Complete demand systems
- Consumer behavior
- Laffer curves
- Dupuit curves