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Journal of Economic Geography 3:275-287 (2003)
Copyright © 2003 Oxford University Press

Article

Two-dimensional fiscal competition

Yoshiaki Ohsawa* and Takeshi Koshizuka**

*Institute of Policy and Planning Sciences, University of Tsukuba, Tsukuba 305-8573, Japan. email <osawa{at}sk.tsukuba.ac.jp>
**Institute of Policy and Planning Sciences, University of Tsukuba, Tsukuba 305-8573, Japan. email <koshizuk{at}rootpi.sk.tsukuba.ac.jp>

Abstract

This paper analyses commodity tax competition between two neighboring countries whose governments are tax-revenue maximizers in a two-dimensional market. The results suggest three conclusions in a geographical sense. First, a small country sets a lower tax than does a big country, and per capita revenue of the small country is larger than that of the big country. Second, these two countries are subject to severer competitive pressure in the case of a more curved national border. Finally, the impact of border curvature on tax and revenue differences are always opposite in sign with the impact on tax and revenue ratios.

Keywords: tax competition, two dimensions, cross-border shopping, Nash equilibrium

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