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

  • Kristian, BEHRENS
  • Johnathan H. HAMILTON
  • Gianmarco I.P., OTTAVIANO

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, Département des Sciences Economiques in its series Discussion Papers (ECON - Département des Sciences Economiques) with number 2007020.

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Length: 41
Date of creation: 01 Jul 2007
Date of revision:
Handle: RePEc:ctl:louvec:2007020
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