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Optimal factor and commodity taxation in a small open economy

  • Andreas Haufler

A two-sector trade model with perfect international capital mobility and endogenous supply of specific factors is used to analyze the relation between selective taxes on production (origin-based commodity taxes) and source-based taxes on capital income. A small open economy will set both of these taxes equal to zero when it is able to tax all specific factors optimally. In the absence of a domestic motive for capital taxation a switch towards origin-based commodity taxes leads to a negative source tax on capital (i.e., a subsidy). However, when one of the specific factors is in fixed supply and cannot be taxed by a separate instrument, then the optimal capital tax rate is positive and may be further increased by the introduction of a selective production tax.

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File URL: http://hdl.handle.net/10.1007/BF00540221
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Article provided by Springer in its journal International Tax and Public Finance.

Volume (Year): 3 (1996)
Issue (Month): 4 (October)
Pages: 523-527

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Handle: RePEc:kap:itaxpf:v:3:y:1996:i:4:p:523-527
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  1. 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.
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