Commodity taxation and regulatory competition

This paper studies competition in regulation and commodity taxation between trading countries. We present a general equilibrium model in which destination-based consumption taxes finance public goods and regulation of entry affects the number of firms in the markets. We find (i) no strategic interaction in commodity taxes; (ii) regulation leads to lower commodity tax rates if demand for public goods is more sensitive to income than demand for private goods and (iii) regulation policy is a strategically complement instrument if consumers do not value product diversity too highly. We test our predictions using panel data for 21 OECD countries over the period 1990-2008. Our empirical analysis confirms the absence of strategic interactions for commodity taxes and show that domestic deregulation have positive effects on domestic commodity taxes. Countries also relax their regulation policies in response to the deregulation waves in their trade partner countries.

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