Does Redistribution Provide a Rationale for Source- and Origin-Based Taxes in Small Open Economies?

Abstract:     
This paper investigates whether the pursuit of redistributional objectives may provide a rationale for source- and origin-based taxation in small open economies. The analysis is developed in a simple two-class economy where consumers are classified according to the type of labour they supply. Source-based taxes on capital income and commodity origin-based taxes result in a differential burden on the two types of labour. When labour income is taxed with a linear schedule, the government can exploit the differential incidence of source- and origin-based taxes to improve income allocation. By contrast, if a non-linear tax is levied on labour income, source and origin-based taxes cannot directly improve income distribution as the two types of labour have different marginal tax rates. However, they can improve social welfare by relaxing the self-selection constraints that bind the nonlinear tax.

Number of Pages in PDF File: 39

Keywords: Capital income taxation, commodity taxation, income distribution, taxation in open economies, tax incidence

JEL Classification: H21, H22, H73, D33

working papers series