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Commodity tax competition and industry location under the destination and the origin principle

  • BEHRENS, Kristian
  • HAMILTON, Jonathan H.
  • OTTAVIANO, Gianmarco I.P.
  • THISSE, Jacques-François

We develop a model of commodity tax competition with monopolistically competitive internationally mobile firms, transport costs, and asymmetric country sizes. We investigate the impacts of non-cooperative tax setting, as well as of tax harmonization and changes in the tax principle, in both the short and the long run. The origin principle, when compared to the destination principle, is shown to exacerbate tax competition and to erode tax revenues, yet leads to a more equal spatial distribution of economic activity. This suggests that federations which care about spatial inequality, like the European Union, face a non-trivial choice for their tax principle that goes beyond the standard considerations of tax revenue redistribution.

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Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers RP with number 2101.

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Handle: RePEc:cor:louvrp:2101
Note: In : Regional Science and Urban Economics, 39, 422-433, 2009
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  24. Behrens, Kristian & Hamilton, Jonathan H. & Ottaviano, Gianmarco I.P. & Thisse, Jacques-Francois, 2007. "Commodity tax harmonization and the location of industry," Journal of International Economics, Elsevier, vol. 72(2), pages 271-291, July.
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