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Tax competition and the creation of redundant products

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There are products that are assembled from kits but that, once assembled, are identical to other products. An example is the roll-your-own cigarette. Because the kit requires time to assemble, it is more costly than the assembled product; in the absence of tax competition, the kit is not bought or is ‘redundant.’ I show that tax competition between regions supports strategies that tax the ‘redundant’ product at a lower tax rate than its assembled counterpart, and it is bought. A welfare loss is thereby created. JEL classification: H71

Document Type: Research Article


Affiliations: Department of Economics, University of Colorado

Publication date: 2007-11-01

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