Tax harmonisation and the origin principle

The purpose of this paper is to discuss whether a tax harmonisation based on the origin principle can be actual Pareto-improvement (API) and potential Pareto-improving (PPI) in the presence of public good provision. We show that there are situations in which some tax harmonisation leads to API and PPI. In such cases, tax harmonisation converges towards the optimal tax and leads to the API. For instance, in a two-country framework, if the foreign country has an initial level of distortion higher than the home country around the optimal tax, its initial tax rate must be lower (higher) than home country in order to obtain a PPI. (C) 2001 Elsevier Science B.V. All rights reserved