DP4671 Destination- versus Origin-based Commodity Taxation and the Location of Industry

Author(s): Kristian Behrens , Jonathan Hamilton , Gianmarco Ireo Paolo Ottaviano , Jacques-François Thisse

Publication Date: October 2004

Keyword(s): commodity tax , origin principle , destination principle , tax harmonization , home market effect

JEL(s): F12 , H22 , H87 , R12

Programme Areas: International Trade and Regional Economics , Public Policy

Link to this Page: www.cepr.org/pubs/dps/DP4671.asp

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.