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Optimal Factor and Commodity Taxation in a Small Open Economy

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  • Haufler, Andreas

Abstract

A two-sector trade model with specific factors and perfect international capital mobility is used to analyze the optimal mix of factor and commodity taxation in a small open economy that faces domestic or international constraints on its tax instruments. In the unconstrained benchmark case, the small country will tax specific factors and domestic consumption but chooses zero tax rates for a selective production tax (i.e., an origin-based commodity tax) and a source-based tax on capital income. When commodity taxation must follow a combination of origin and destination principles, then this mixed commodity tax rate will be positive and its production effects are partly compensated in the optimum by a capital subsidy. These international restrictions interact with domestic constraints when rents accruing to fixed factors cannot be taxed by a separate instrument, and a positive tax rate on capital serves as an indirect way of rent taxation.

Suggested Citation

  • Haufler, Andreas, 1996. "Optimal Factor and Commodity Taxation in a Small Open Economy," Munich Reprints in Economics 20393, University of Munich, Department of Economics.
    • Handle: RePEc:lmu:muenar:20393
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    Cited by:

    1. Genser, Bernd & Haufler, Andreas, 1997. "On the optimal tax policy mix when consumers and firms are imperfectly mobile," Discussion Papers, Series II 330, University of Konstanz, Collaborative Research Centre (SFB) 178 "Internationalization of the Economy".
    2. Bjerksund, Petter & Schjelderup, Guttorm, 1998. "The political economy of capital controls and tax policy in a small open economy," European Journal of Political Economy, Elsevier, vol. 14(3), pages 543-559, August.
    3. Wolfgang Eggert & Bernd Genser, 2001. "Is Tax Harmonization Useful?," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 8(4), pages 511-527, August.
    4. Bruno de Borger & Stef Proost, 2004. "Vertical and horizontal tax competition in the transport sector," Reflets et perspectives de la vie économique, De Boeck Université, vol. 0(4), pages 45-64.
    5. Giampaolo Arachi, 2001. "Efficient Tax Competition with Factor Mobility and Trade: A Note," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 8(2), pages 171-188, March.
    6. Genser, Bernd & Haufler, Andreas, 1996. "Tax policy and the location decision of firms," Discussion Papers, Series II 306, University of Konstanz, Collaborative Research Centre (SFB) 178 "Internationalization of the Economy".

    More about this item

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F30 - International Economics - - International Finance - - - General
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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