Tax exporting and the marginal cost of public spending

Abstract

It is widely held that tax exporting lowers the relative price of public goods and induces inefficiently large amounts of public spending. This paper finds, to the contrary, that the ability to export taxes need not in general lower the effective cost of public spending. A simple model is developed in which a jurisdiction optimizes the mix of taxes between those on traded and non-traded goods. Once this structure is optimally set, the jurisdiction is indifferent between exported and own-source revenues, and the marginal cost of public expenditure is unaffected by the possibility of exporting. This argument is illustrated with an example in which the prohibition of taxation of traded goods results in no change in government spending.