Two-dimensional fiscal competition

This paper analyses commodity tax competition between two neighboring countries whose governments are tax‐revenue maximizers in a two‐dimensional market. The results suggest three conclusions in a geographical sense. First, a small country sets a lower tax than does a big country, and per capita revenue of the small country is larger than that of the big country. Second, these two countries are subject to severer competitive pressure in the case of a more curved national border. Finally, the impact of border curvature on tax and revenue differences are always opposite in sign with the impact on tax and revenue ratios.