Theoretical Economics 20 (2025), 1007–1041

The conventional wisdom is that a big jurisdiction sets a higher tax rate than a small jurisdiction. We show this result arises due to simplifying assumptions that imply tax-base sensitivities are equal across jurisdictions. When more than two jurisdictions compete in commodity taxes, tax-base sensitivities need not be equal across jurisdictions and a small jurisdiction can set a higher tax rate than a big jurisdiction. Our analysis extends to capital and profit taxes, and, more generally, to various types of multi-player asymmetric competition.

Keywords: Ramsey rule, inverse elasticity, fiscal competition, optimal taxation, spatial price competition, sales tax

JEL classification: C7, D4, H2, H7, L1, R5