Spatial economic analysis of the effects of electronic commerce on state and local taxes

The purpose of my dissertation is to develop a spatial economic model that can be used to examine the competition between traditional and online sellers, the effects of this competition on state and local sales tax revenue, and the optimal response of governments to these changes in retail markets. In Chapter 1, the model is used to see how changes in various parameters affect the competition between conventional and online sellers and the level of sales tax revenue when the tax rate is exogenous. More specifically, I consider a reduction in online transaction costs, an increase in online tax compliance and an increase in the sales tax rate. The first and the third parameter changes reduce the conventional retailer's market share, while the second parameter change increases the market share of the conventional retailer. All three parameters changes have ambiguous effects on total sales tax revenue. In Chapter 2, I expand the model to consider explicitly the effects of the level of product complexity. I show that the net effects of changes in various parameters on the government's total sales tax revenue depend on the share of complex goods in its tax base. The more complex the composition of the tax base, the smaller is the potential tax loss due to Internet competition. Also, any fiscal advantage of electronic retailers becomes more important as product complexity increases. Finally, Chapter 3 reconsiders some of the issues addressed in previous chapters, except that now the government is allowed to react to parameter changes by altering its (previously exogenous) sales tax. In this more complete model, an increase in the tax compliance rate for Internet transactions causes a revenue-maximizing government to increase its optimal sales tax. This response stems from the reduction in e-buyers' tax avoidance due to the higher rate of Internet tax compliance. On the other hand, a decrease in transaction costs for Internet purchases causes the government to lower its sales tax. Finally, an increase in product complexity allows the conventional firm to increase its market share, and the government responds by increasing its sales tax.