Discussion Papers, Center for European Governance and Economic Development Research 265
This paper studies the effect of an online retailer on spatial tax competition with mobile consumers. If taxation for online purchases follows the destination principle, the entry of the online retailer mitigates tax competition; if taxation for online purchases follows the origin principle, the entry of the online retailer enhances tax competition. Lower cost of online shopping enhances the effect of the online retailer on tax competition, limited internet access decreases the effect of the online retailer on tax competition. For sufficiently low cost of online shopping, welfare in the country where the online retailer is located is higher under the origin principle and welfare in the other country is higher under the destination principle. Total welfare is higher under the destination principle.