The Internet as a Tax Haven?: The Effect of the Internet on Tax Competition

Abstract

High Internet penetration puts downward pressure on tax rates as jurisdictions seek to reduce revenue leakage to tax-free sales; but, taxable online sales will put upward pressure on tax rates because the Internet facilitates tax collection. I find that an increase in Internet penetration induces large municipalities on the low-state-tax side of state borders to lower their local tax rates by more than municipalities on the high-state-tax side. I then use panel data on all local sales tax rates in the country and changes in Internet subscription rates to show that the effect of Internet penetration changes is negative.