Conventionally, tax exporting is thought to lower the effective cost of public services, thereby creating an incentive to increase public expenditure. This paper shows, however, that the effect of tax exporting on public spending depends critically on the nature of non-exorted taxes. In general, tax exporting influences spending, if at all, by creating income effects and by affecting the marginal excess burden of non-exported taxes. If, for example, taxes on non-traded goods are distortionless, the marginal cost of public spending will not be reduced at all even though an additional dollar of revenue raised by taxation of a traded good may impose a very high burden on non-residents of the taxing jurisdiction. These results have a number of implications for empirical and policy analysis.

David E. Wildasin / dew@davidwildasin.us