Technological innovations facilitating e-commerce have had major effects on consumer behavior and firm organization in the retail sector, but the effects of these new transaction technologies on fiscal systems remain unknown. We extend models of commodity tax competition to include multiple types of commodities, trade, and remote commerce, assuming, in accordance with current policy, that e-commerce is taxed at destination while cross-border shopping is taxed at origin. When the cost of online shopping falls, we show that equilibrium tax rates and revenues decrease in large, core jurisdictions but increase in small, peripheral ones, reducing tax differentials. Policy commentators warn that e-commerce erodes tax revenue – true enough for some governments – but, more accurately, changing transaction costs can generate entirely new commercial and fiscal equilibria that ultimately “redistribute” tax revenues from jurisdictions with concentrations of traditional vendors toward others. With some reinterpretation, the model is also adapted to analyze profit-tax competition when firms can respond to high taxes both through profit-shifting and through relocation, each dependent on transactions costs. Changes in technology may again redistribute tax revenues from high-tax to low-tax jurisdictions.
