International travellers are frequently offered the opportunity to purchase a certain quantity of goods duty-free. Individuals differ in their opportunities to benefit from duty-free shopping, and we focus on the implications of these differences for optimal commodity taxation within a version of the optimal tax model of Mirrlees (1971).We show how duty-free alters the constraints on the use of commodity taxes to reduce the distortionary costs of income taxation or to reflect externalities. Beyond characterising optimal taxes in the duty-free regime, we discuss conditions under which allowing duty-free would increase or reduce social welfare.
Reference: Vidar Christiansen and Stephen Smith (2008) "Optimal Commodity Taxation with Duty-Free Shopping", International Tax and Public Finance, 15(3), pp 274-296. ISSN 0927-5940. DOI: 10.1007/s10797-007-9034-z.
.pdf file at SpringerLink
Other papers on the economics of duty-free shopping
Vidar Christiansen and Stephen Smith (2001) "The Economics of Duty-Free Shopping" CESifo Working Paper No 595, ISSN 1617-9595, October 2001. Munich: CESifo.
Vidar Christiansen and Stephen Smith (2004) "National Policy Interests in the Duty Free Market", CESifo Economic Studies, vol 50, 2/2004, 351-375. ISSN 1610-241X