Destination- Versus Origin-Based Commodity Taxation and the Location of Industry

Behrens, Kristian; Ottaviano, Gianmarco I.P.; Hamilton, Jonathan H.; Thisse, Jacques-François

Destination- Versus Origin-Based Commodity Taxation and the Location of Industry

33 Pages Posted: 14 Dec 2004

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: October 2004

Abstract

This Paper studies the positive aspects of destination vs. origin principles of commodity taxation as well as tax harmonization, with an emphasis on the international implications of these measures when firms are mobile. We investigate the tax incidence of these two principles on price levels and uncover how taxes and trade costs interact. While under the destination principle an increase in the tax rate of a country always causes some firms to relocate to the other, this effect may get reversed under the origin principle when economic integration is deep enough, so that a tax increase leads to an inflow of capital.

Keywords: Commodity tax, origin principle, destination principle, tax harmonization, home market effect

JEL Classification: F12, H22, H87, R12

Suggested Citation: Suggested Citation

Behrens, Kristian and Ottaviano, Gianmarco I.P. and Hamilton, Jonathan H. and Thisse, Jacques-François, Destination- Versus Origin-Based Commodity Taxation and the Location of Industry (October 2004). Available at SSRN: https://ssrn.com/abstract=634963