Scale economies in cross-border shopping and commodity taxation

A simple inventory theoretic model of cross-border shopping with transactio n and storage costs is developed. Consumers incur fixed transaction and tra nsportation costs to access the foreign market in which a perfect substitut e of the domestic good is available. We show that the size of the optimal t ax is inversely related to the size of domestic transactions. This result p rovides a simple example of a more general principle, that is, when there a re increasing returns to scale in tax avoidance with respect to the quantit ies involved, then smaller transactions should be taxed more heavily than l arger transactions.