Working Paper: CEPR ID: DP17093
Authors: Pedro Teles; V. V. Chari; Juan Pablo Nicolini
Abstract: How should countries cooperate in setting fiscal and trade policies when government expenditures must be financed with distorting taxes? We show that even if countries cannot make explicit transfers to each other, every point on the Pareto frontier is production efficient, so that international trade and capital flows should be effectively free. Trade agreements must be supplemented with fiscal policy agreements. Residence-based income tax systems have advantages over source-based systems. Taxing all household asset income at a country-specific uniform rate and setting the corporate income tax to zero yield efficient outcomes. Value-added taxes should be adjusted at the border.
Keywords: capital income tax; free trade; value-added taxes; border adjustment; origin and destination-based taxation; production efficiency
JEL Codes: E60; E61; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| countries cooperate on fiscal and trade policy (F42) | production efficiency (D24) |
| tax structure (H20) | efficiency in international trade (F10) |
| residence-based income tax systems (H24) | better outcomes than source-based systems (P47) |
| taxing all household asset income at a uniform rate (H31) | efficient outcomes (D61) |
| setting corporate income tax to zero (H29) | efficient outcomes (D61) |
| adjusting value-added taxes at the border (H25) | maintain efficiency in trade (F10) |
| trade taxes (H29) | redistribute resources without compromising production efficiency (D61) |