Working Paper No. 05-03

Tax Competition and the Creation of Redundant Products
Charles A. M. de Bartolome
July 2005


There are products which are assembled from kits but which, once assembled, are identical to other products. An example is the roll-your-own cigarette. Because the kit requires time to assemble, it is more costly than the assembled product; in the absence of taxation, the kit is not bought or is "redundant". Regions seek to maximize the tax revenue gained by excise taxes. We show that tax competition supports strategies which tax the "redundant" product at a lower tax rate than its assembled counterpart and it is bought. A welfare loss is thereby created.