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The choice of commodity tax base in the presence of horizontal foreign direct investment

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  • Scott McCracken

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Abstract

We analyse the choice of commodity tax base, when countries set their taxes non-cooperatively in a reciprocal dumping model of homogeneous goods trade with horizontal foreign direct investment (FDI). We show that the consumption base (destination principle) weakly welfare-dominates the production base (origin principle) for a large range of plant fixed costs. When integration is complete, the destination principle dominates the origin principle for all levels of plant fixed costs below which FDI occurs under the origin principle. This contrasts with much of the existing literature which has tended to support the origin principle under imperfect competition with a fixed market structure. Copyright Springer Science+Business Media New York 2015

Suggested Citation

  • Scott McCracken, 2015. "The choice of commodity tax base in the presence of horizontal foreign direct investment," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 22(5), pages 811-833, October.
  • Handle: RePEc:kap:itaxpf:v:22:y:2015:i:5:p:811-833
    DOI: 10.1007/s10797-014-9332-1
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    References listed on IDEAS

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    Cited by:

    1. Onur A. Koska & Frank Stähler & Onur Yeni, 2017. "Trade and Commodity Taxes as Environmental Instruments in an Open Economy," ERC Working Papers 1704, ERC - Economic Research Center, Middle East Technical University, revised May 2017.

    More about this item

    Keywords

    Commodity taxation; Trade; Imperfect competition; Foreign direct investment; Economic integration; F12; H20;

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

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