Commodity Tax Competition and Industry Location Under the Destination- and the Origin-Principle

CORE Discussion Paper No. 2007/34

39 Pages Posted: 17 Aug 2007

See all articles by Kristian Behrens

Kristian Behrens

Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE); Université de Bourgogne - LATEC

Gianmarco I.P. Ottaviano

Bocconi University - Department of Economics and Paolo Baffi Centre on Central Banking and Financial Regulation

Jonathan H. Hamilton

University of Florida - Warrington College of Business Administration - Department of Economics

Jacques-François Thisse

Catholic University of Louvain (UCL); Centre for Economic Policy Research (CEPR)

Date Written: April 26, 2007

Abstract

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.

Keywords: commodity tax competition, origin principle, destination principle, tax harmonization, industry location

JEL Classification: F12, H22, H87, R12

Suggested Citation

Behrens, Kristian and Ottaviano, Gianmarco I.P. and Hamilton, Jonathan H. and Thisse, Jacques-François, Commodity Tax Competition and Industry Location Under the Destination- and the Origin-Principle (April 26, 2007). CORE Discussion Paper No. 2007/34. Available at SSRN: https://ssrn.com/abstract=1006816 or http://dx.doi.org/10.2139/ssrn.1006816

Kristian Behrens (Contact Author)

Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE) ( email )

34 Voie du Roman Pays
B-1348 Louvain-la-Neuve, b-1348
Belgium

HOME PAGE: http://www.core.ucl.ac.be:16080/~behrens/

Université de Bourgogne - LATEC

Pôle d'Economie et de Gestion
21066 Dijon Cedex
France

Gianmarco I.P. Ottaviano

Bocconi University - Department of Economics and Paolo Baffi Centre on Central Banking and Financial Regulation ( email )

Via Gobbi 5
Milan, 20136
Italy

Jonathan H. Hamilton

University of Florida - Warrington College of Business Administration - Department of Economics ( email )

Gainesville, FL 32611-7140
United States
352-392-5017 (Phone)
352-392-7860 (Fax)

HOME PAGE: http://people.clas.ufl.edu/hamilton/

Jacques-François Thisse

Catholic University of Louvain (UCL) ( email )

Place des Doyens 1
Louvain-la-Neuve, 1348
Belgium

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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