The rapid rise in sales over the Internet and the fact that most Internet buyers pay no sales tax has ignited a considerable debate over taxes and the Internet. This paper uses new data on the purchase decisions of approximately 25,000 online users to examine the effect of local sales taxes on Internet commerce. The results suggest that, controlling for observable characteristics, people living in high sales taxes locations are significantly more likely to buy online. The results are quite robust and cannot be explained by unobserved technological sophistication, shopping costs, or other alternative explanations. The magnitudes in the paper suggest that applying existing sales taxes to Internet commerce might reduce the number of online buyers by up to 24 percent.

This paper provides new evidence that state policies play a role in the location of industry. The paper classifies a state as pro-business or anti-business depending upon whether or not the state has a right-towork law. The paper finds that, on average, there is a large abrupt increase in manufacturing activity when crossing a state border from an anti-business state into a pro-business state. *The views expressed herein are those of the author and not necessarily those of the Federal Reserve Bank of Do the pro-business policies pursued by some states attract industry? This is a controversial issue. In state capitals throughout the country, proponents of probusiness policies routinely claim that state policies are an important determinant of business location. But this claim is open to debate. While there has been no shortage

In 2007 all ECB publications feature a motif taken from the €20 banknote. This paper can be downloaded without charge from

The traditional view that a high sales tax rate reduces trade by driving a wedge between the purchase and sale price may not apply to internet commerce for two reasons. The first reason is that the sales tax paid by buyers purchasing via the internet is determined by the tax rate in the region of the buyer. The second reason is that a high sales tax may lower the before-tax price if sellers absorb part of the tax. Taken together, this implies that internet distributors may profitably target customers in regions with low tax rates by locating their selling addresses in high tax regions. Consequently the optimal marketing strategy for a global internet distributor may include siting selling locations in regions with high tax rates in order to target customers in regions with low tax rates. An empirical analysis of the European car market suggests that this is more than a remote theoretical possibility by demonstrating that the before-tax prices recommended by manufacturers for new cars are lower in high tax countries.

This paper has benefited from workshop participants at the University of North Carolina and Stanford University. The views expressed herein are those of the authors and not necessarily those of the National

We examine how differences in state income tax rates, as well as other state and local taxes and public service expenditures, influence the choice of state of residence for households (federal tax filers) moving into multistate metropolitan statistical areas (MSA) using data from the one in twenty sample of the 2000 Census of Population and Housing microdata extracted from the Integrated Public Use Microdata Series (IPUMS). MSAs that are on borders provide a spatial discontinuity – discrete differences in state tax rates within a single labor market. These MSAs allow residents to live in one state and work in another state. After controlling for other factors believed to affect household location, we find that differences in state income tax rates have a statistically significant The impact of state and local taxes on the location of economic activity has been the topic of a now voluminous literature, both theoretical and empirical. Numerous studies, primarily theoretical, have examined whether or not tax competition among subnational or even national governments will lead to efficacious policies. As numerous are empirical studies that examine the

This paper reviews issues and evidence concerning tax-motivated cross-border commodity transactions. A distinction is drawn between ‘arbitrage trades ’ (driven by cross-country differences in tax rates) and ‘tax not paid ’ transactions (motivated by the opportunity to pay no tax at all on transactions with—perhaps fictitious—international aspects). The literature, it is argued, has under-played the potential importance of the latter. Empirical work suffers from the handicap that many cross-border transactions of interest are illegal, and assessment of the severity of the policy problem must face the difficulty that the extent of cross-border transactions actually observed conveys no information on the induced inefficiency in tax-setting that the possibility of such transactions may generate. It is argued too that, given the difficulty of securing coordination of national tax policies, much of the emphasis in dealing with these problems in the coming years is likely to be on administrative cooperation.