Commodity tax competition and industry location under the destination and the origin principle ¬リニ

a r t i c l e i n f o We extend the model by Behrens et al. to the case of non-cooperative commodity taxation and investigate the impacts of tax harmonization and changes in tax principle on equilibrium tax rates, industry location, and welfare. Since our setup features internationally mobile firms, trade frictions, and asymmetric country sizes, it offers a convenient framework within which to investigate how differences in market size and deepening international integration affect equilibrium outcomes under competing tax principles. The origin principle, when compared to the destination principle, is shown to exacerbate tax competition and to erode tax revenues, yet gives rise to a more equal spatial distribution of economic activity. This suggests that federations which care about spatial inequality, like the European Union, face a non-trivial choice for their tax principle that goes beyond the standard considerations of tax revenue distribution. Increases in factor mobility and economic integration have given rise in the European Union (henceforth, EU) to concerns about the possibilities of tax competition eroding governments' ability to finance public expenditure and to maintain the welfare state. Devolution of responsibility for public services to regions within the EU has arguably further increased opportunities for harmful tax competition, both within and between countries. In the USA, where state and local taxes support several important categories of public expenditure, concern about tax competition has a much longer history but remains, nevertheless, a contentious issue. In recent years, one added source of concern in both the EU and the USA has been the development of e-commerce, which has exacerbated already existing pressures on cross-border tax systems (Goolsbee, 2001). Furthermore, in the case of the EU, increasing economic integration might be an important driver for regional inequalities, and these inequalities may be further amplified by tax competition. Since one of the social cohesion objectives of the EU, as explicitly spelled out by Article 130a of the Amsterdam Treaty of 1997, is to " aim at reducing disparities between the levels of development of the various regions and the backwardness of the least favoured regions or islands, including rural areas " , tax competition may have additional indirect costs if it were to accelerate regional divergence, thus leading to the increased use of structural funds to reverse such an undesirable evolution. 1 While much of the tax competition literature focuses on capital or corporate profit taxes, there are …