Working Paper: CEPR ID: DP4671
Authors: Kristian Behrens; Jonathan Hamilton; Gianmarco I.P. Ottaviano; Jacques-François Thisse
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; destination principle; home market effect; origin principle; tax harmonization
JEL Codes: F12; H22; H87; R12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increase in a country's tax rate (H29) | Some firms relocate to another country (F23) |
| Increase in a country's tax rate (H29) | Inflow of firms (F23) |
| Destination principle (F16) | Firm relocation (R30) |
| Origin principle (Y20) | Potential reverse home market effect (R31) |
| Tax principles (destination and origin) (H22) | Causal pathways differ based on tax principle applied (H22) |