Sensitivity versus size: Implications for tax competition

The conventional wisdom is that a large jurisdiction sets a higher tax rate than a small jurisdiction. We show that this result arises due to simplifying assumptions that imply that 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 large jurisdiction. Our analysis extends to capital and profit taxes, and, more generally, to various types of multi‐player asymmetric competition.