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Consumption and cash-flow taxes in an international setting

  • Alan J. Auerbach


    (University of California, Berkeley)

  • Michael P. Devereux


    (Oxford University Centre for Business Taxation)

We model the effects of consumption-type taxes which differ according to the base and location of the tax. Our model incorporates a multinational producing and selling in two countries with three sources of rent, each in a different location: a fixed basic production factor (located with initial production), mobile managerial skill, and a fixed final production factor (located with consumption). In the general case, we show that for national governments, there are tradeoffs in choosing between alternative taxes. In particular, a cash-flow tax on a source basis creates welfare-impairing distortions to production and consumption, but is partially incident on the owners of domestic production who may be non-resident. By contrast, a destination-based cash-flow tax does not distort behavior, but is incident only on domestic residents. In the alternative case with the returns to the fixed factors accruing to domestic residents, the only distortion from the source-based tax is through the allocation of the mobile managerial skill. In this case, the source-based tax is also incident only on domestic residents, and is dominated by an equivalent tax on a destination basis.

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Paper provided by Oxford University Centre for Business Taxation in its series Working Papers with number 1311.

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Date of creation: 2013
Date of revision:
Handle: RePEc:btx:wpaper:1311
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  1. David Bradford, 2004. "The X Tax in the World Economy," CESifo Working Paper Series 1264, CESifo Group Munich.
  2. 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.
  3. Lockwood, Ben, 1992. "Commodity Tax Competition Under Destination and Origin Principles," CEPR Discussion Papers 733, C.E.P.R. Discussion Papers.
  4. Gordon, Roger H & Wilson, John Douglas, 1986. "An Examination of Multijurisdictional Corporate Income Taxation under Formula Apportionment," Econometrica, Econometric Society, vol. 54(6), pages 1357-73, November.
  5. Harry Grubert & T. Scott Newlon, 1997. "Taxing Consumption in a Global Economy," Books, American Enterprise Institute, number 52737, September.
  6. Auerbach, Alan J, 1997. "The Future of Fundamental Tax Reform," American Economic Review, American Economic Association, vol. 87(2), pages 143-46, May.
  7. 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.
  8. Gordon, Roger H, 1986. "Taxation of Investment and Savings in a World Economy," American Economic Review, American Economic Association, vol. 76(5), pages 1086-1102, December.
  9. Bond, Stephen Roy & Devereux, Michael P., 2002. "Cash Flow Taxes in an Open Economy," CEPR Discussion Papers 3401, C.E.P.R. Discussion Papers.
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