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

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.regsciurbeco.2009.01.008 Byline: Kristian Behrens (a)(b)(c), Jonathan H. Hamilton (d), Gianmarco I.P. Ottaviano (e)(f)(g), Jacques-Francois Thisse (g)(h) Keywords: Commodity tax competition; Origin principle; Destination principle; Tax harmonization; Industry location Abstract: We extend the model by Behrens et al. [Behrens, K., Hamilton, J.H., Ottaviano, G.I.P., Thisse, J.-F., 2007a. Commodity tax harmonization and the location of industry. Journal of International Economics 72, 271-291.] 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. Author Affiliation: (a) Departement de Sciences Economiques, Universite du Quebec a Montreal, Canada (b) CIRPEE, Canada (c) CORE, Universite catholique de Louvain, Belgium (d) Department of Economics, University of Florida, USA (e) Faculty of Economics, Bocconi University Milan, Italy (f) FEEM, Italy (g) CEPR, United Kingdom (h) PSE, France Article History: Received 23 October 2008; Revised 20 December 2008; Accepted 7 January 2009 Article Note: (footnote) [star] This paper is dedicated to Masahisa Fujita for his 65th birthday.