Commodity Taxation with Honesty, Avoidance and Evasion: Evidence from the United States

Abstract

Sales taxes are due at the point of sale; use taxes are due on goods purchased abroad. We develop a tax competition model that distinguishes between tax avoidance and tax evasion. We show that the optimal use tax rate does not necessarily equal the sales tax rate. When localities set both tax rates, the divergence of the two rates is stronger when the incentives for tax avoidance opportunities increase. We assemble the first panel dataset of use tax rates. In response to changes in policies that increase tax avoidance, the results of the empirical model confirm our theory. Combining theory and empirics, we conclude that the elasticity of evasion is large or the elasticity of honesty is small.