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Commodity Tax Harmonization with Public Goods - An Alternative Perspective

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  • Lockwood, Ben

Abstract

This paper investigates whether it is possible to find Pareto-improving commodity tax reforms that harmonize taxes between two countries when governments supply public goods and thus have revenue requirements. To focus on the basic issues, we consider a Ricardian model of trade with elastic factor supply and two traded goods, and suppose that initial taxes are Nash equilibrium ones. This allows a complete characterization of the conditions under which Pareto-improving reforms exist using simple geometric arguments. These conditions are completely determined by: (i) the configuration of initial taxes across countries; and (ii) whether the two goods are substitutes or complements. An example suggests that harmonization is unlikely to be Pareto-improving if the revenue requirement is high, and the demand for imports relatively price elastic, in both countries. An alternative definition of harmonization, difference harmonization, which may yield Pareto-improvements under more general conditions, is proposed.

Suggested Citation

  • Lockwood, Ben, 1995. "Commodity Tax Harmonization with Public Goods - An Alternative Perspective," CEPR Discussion Papers 1304, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:1304
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    References listed on IDEAS

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    1. Eichengreen, Barry, 1993. "European Monetary Unification," Journal of Economic Literature, American Economic Association, vol. 31(3), pages 1321-1357, September.
    2. Bertola, Giuseppe, 1992. "Models of Economic Integration and Localized Growth," CEPR Discussion Papers 651, C.E.P.R. Discussion Papers.
    3. Barry Eichengreen & Jeffry Frieden, 1993. "The Political Economy Of European Monetary Unification: An Analytical Introduction," Economics and Politics, Wiley Blackwell, vol. 5(2), pages 85-104, July.
    4. Paul Krugman, 1991. "History versus Expectations," The Quarterly Journal of Economics, Oxford University Press, vol. 106(2), pages 651-667.
    5. Martin, Philippe & Rogers, Carol Ann, 1995. "Industrial location and public infrastructure," Journal of International Economics, Elsevier, vol. 39(3-4), pages 335-351, November.
    6. Gasiorek, Michael, 1994. "Factor mobility, trade liberalisation," Discussion Papers in Economics 08/94, Department of Economics, University of Sussex.
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    More about this item

    Keywords

    Commodity Tax Reform; Tax Harmonization;

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods

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