International commodity taxation in the presence of unemployment

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jpubeco.2009.03.002 Byline: Simone Moriconi (a)(b), Yasuhiro Sato (c) Keywords: Commodity taxation; Destination principle; Origin principle; Unemployment; Employment externality Abstract: In this paper, we evaluate the impact of commodity tax competition on welfare and employment under the destination and origin principles, when the labor market is imperfectly competitive owing to a binding fixed wage. Our main finding is that commodity taxation causes an employment externality whose signs may be opposite under the two principles. While tax competition leads to inefficient tax rates under both principles, we also prove that the origin principle guarantees lower unemployment and higher welfare when the fixed wage is high. Finally, we show that the employment externality still exists in a standard union model of wage determination. Author Affiliation: (a) SEMeQ, Universita del Piemonte Orientale, Via Perrone 18, 28100, Novara, Italy (b) CEP, London School of Economics, Houghton Street, London, WC2A 2AE, UK (c) Graduate School of Economics, Osaka University, 1-7, Machikaneyama, Toyonaka 560-0043, Japan Article History: Received 4 October 2006; Revised 15 December 2008; Accepted 20 March 2009