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The following chapters address the issue which of the feasible tax principles should be chosen in the EC internal market. A tax reform approach is adopted to compare the effects of an intra-Community tax differential under the restricted destination principle and the restricted origin principle. The analysis focuses on redistributive changes in the terms of trade and in national tax bases. While no explicit analysis of non-cooperative tax setting is attempted here, the redistributive effects induced by an intra-Community tax differential indicate the direction that tax competition may take under each of the two tax principles analyzed.

In the previous analysis, the policy question was to ask for a second-best tax principle in the internal market given the existence of an exogenously determined tax differential within the Community. In this chapter, the focus of the analysis is reversed and the issue of tax rate harmonization is studied, given the choice of the restricted destination principle for taxing intra-Community trade.

The purpose of this chapter is to give an overview of the policy issues that have arisen in connection with the harmonization of general commodity taxes in the European Community1. Section 1.1 of this chapter introduces basic concepts of international taxation. Section 1.2 outlines the harmonization measures taken by the European Community in response to the abolition of border controls in the EC internal market. A brief survey of some earlier controversies on value-added taxation is included in order to put the recent debate into perspective. Section 1.3 analyzes the policy choices for value-added taxation in the internal market with respect to their basic economic effects and compares them to alternative proposals. The discussion emphasizes the role of external constraints on the set of feasible solutions and prepares the ground for an analytical comparison of alternative tax principles in the EC internal market.