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Which border taxes? Origin and destination regimes with fiscal competition in output and emission taxes

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  • Cremer, Helmuth
  • Gahvari, Firouz

Abstract

This paper posits a two-stage game in tax regime and tax rates to study the property of second-best emission and output taxes in a two-country world with an atmospheric externality. It shows that (i) either the destination–destination or the origin–origin tax regime may constitute the subgame perfect Nash equilibrium of this game; (ii) either regime may Pareto-dominate the other; (iii) it is possible to have a prisoner's dilemma game where the origin–origin regime Pareto-dominates but the choice of the destination regime is the dominant strategy for each country. Other results include (iv) under origin–origin regime: the output tax is used for fiscal competition; the emission tax is set at a rate equal to the (national) marginal social damage of emissions; and public goods are provided suboptimally. (v) Under destination–destination regime: the output tax is ineffective as an instrument for fiscal competition; the emission tax is used not only for combating pollution but also for tax competition; the tax is set at a rate below the (national) marginal social damage of emissions; emissions are pushed above their closed-economy level; the provision of public goods are optimal.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 90 (2006)
Issue (Month): 10-11 (November)
Pages: 2121-2142

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Handle: RePEc:eee:pubeco:v:90:y:2006:i:10-11:p:2121-2142

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Web page: http://www.elsevier.com/locate/inca/505578

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References

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  1. Lockwood, Ben, 2001. "Tax competition and tax co-ordination under destination and origin principles: a synthesis," Journal of Public Economics, Elsevier, vol. 81(2), pages 279-319, August.
  2. Karp, Larry & Sacheti, Sandeep, 1997. "Common Ground Between Free-traders and Environmentalists," CEPR Discussion Papers 1598, C.E.P.R. Discussion Papers.
  3. Kanbur, Ravi & Keen, Michael, 1993. "Jeux Sans Frontieres: Tax Competition and Tax Coordination When Countries Differ in Size," American Economic Review, American Economic Association, vol. 83(4), pages 877-92, September.
  4. Haufler,Andreas, 2008. "Taxation in a Global Economy," Cambridge Books, Cambridge University Press, number 9780521047593.
  5. Conrad Klaus, 1993. "Taxes and Subsidies for Pollution-Intensive Industries as Trade Policy," Journal of Environmental Economics and Management, Elsevier, vol. 25(2), pages 121-135, September.
  6. MINTZ, Jack & TULKENS, Henry, . "Commodity tax competition between member states of a federation: equilibrium and efficiency," CORE Discussion Papers RP -693, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  7. Kennedy Peter W., 1994. "Equilibrium Pollution Taxes in Open Economies with Imperfect Competition," Journal of Environmental Economics and Management, Elsevier, vol. 27(1), pages 49-63, July.
  8. Lockwood, Ben, 1992. "Commodity Tax Competition Under Destination and Origin Principles," CEPR Discussion Papers 733, C.E.P.R. Discussion Papers.
  9. Michael Keen and Sajal Lahiri, . "The Comparison Between Destination and Origin Principles Under Imperfect Competition," Economics Discussion Papers 424, University of Essex, Department of Economics.
  10. Werner Antweiler & Brian R. Copeland & M. Scott Taylor, 2001. "Is Free Trade Good for the Environment?," American Economic Review, American Economic Association, vol. 91(4), pages 877-908, September.
  11. Wellisch,Dietmar, 2000. "Theory of Public Finance in a Federal State," Cambridge Books, Cambridge University Press, number 9780521630351.
  12. Copeland, Brian R & Taylor, M Scott, 1995. "Trade and Transboundary Pollution," American Economic Review, American Economic Association, vol. 85(4), pages 716-37, September.
  13. Ben Lockwood & David Meza & Gareth Myles, 1994. "When are origin and destination regimes equivalent?," International Tax and Public Finance, Springer, vol. 1(1), pages 5-24, February.
  14. Cremer, Helmuth & Gahvari, Firouz, 2001. "Second-best taxation of emissions and polluting goods," Journal of Public Economics, Elsevier, vol. 80(2), pages 169-197, May.
  15. Wilson, John Douglas, 1999. "Theories of Tax Competition," National Tax Journal, National Tax Association, vol. 52(n. 2), pages 269-304, June.
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Cited by:
  1. Giovanni Ganelli & Juha Tervala, 2010. "International Transmission of Environmental Policy: A New Keynesian Perspective," Discussion Papers 58, Aboa Centre for Economics.
  2. Bandyopadhyay, Subhayu & Bhaumik, Sumon K. & Wall, Howard J., 2009. "Biofuel Subsidies: An Open-Economy Analysis," IZA Discussion Papers 4584, Institute for the Study of Labor (IZA).

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