The Beach: Tax Competition along the Italian Coasts

Space: the final frontier. This paper seeks to understand the spatial dimension of tax competition. We provide two novel contributions to the literature on tax competition. First, we present a spatial model of tax competition, which is an adoption of the Hotelling model of imperfect competition in the linear city. We find that tax rates are strategic complementarities, as a change in taxes of one town will lead to a similar change of tax rates in neighboring towns. Second, we test the model with data from tourism taxes along the Italian coastline. We find that towns on the Thyrennian coast reduce their tax rates in order to attract tourists and additional tax base. We do not find a similar effect on the Adriatic coast, but we still see a reaction of tax rates, pointing to yardstick competition.