Economic integration and the choice of commodity tax base with endogenous market structures

This paper analyzes the choice of commodity tax base when countries set their taxes non-cooperatively in a two-country symmetric reciprocal dumping model of intra-industry trade with free entry and trade costs. We show that the consumption base (destination principle) dominates the production base (origin principle) when trade costs are high or demand is linear. For lower levels of trade costs and nonlinear demand, the welfare ranking of the two tax bases is ambiguous. Hence, there is no clear preference for a tax principle with an ongoing movement towards closer economic Integration. JEL-Classification: F12, H20.UnpublishedBrander, J. and P. Krugman (1983). A Reciprocal Dumping Model of International Trade, Journal of International Economics 15, 313-321. ] Bulow, J., J. Geanakoplos, and P. Klemperer (1985). Multimarket oligopoly: Strategic substitutes and complements, Journal of Political Economy 93, 488-511. Delipalla, S. and M. Keen (1992). The comparison between ad valorem and specific taxation under imperfect competition. Journal of Public Economics 49, 351-367. ] Hahn, F. H. (1962). The Stability of the Cournot Oligopoly Solution, The Review of Economic Studies 29, 329-331. Hashimzade, N., H. Khodavaisi and G. D. Myles (2005). Tax Principles, Product Differentiation and the Nature of Competition, International Tax and Public Finance 12, 1-19. Hashimzade, N., H. Khodavaisi and G. D. Myles (2006). Country Characteristics and Preferences over Tax Principles, mimeo, University of Exeter. ] Haufler, A. and M. Pfl¨uger (2004). International Commodity Taxation Under Monopolistic Competition, Journal of Public Economic Theory 6, 445-470. Haufler, A., G. Schjelderup and F. St¨ahler (2005). Barriers to Trade and Imperfect Competition: The Choice of Commodity Tax Base, International Tax and Public Finance 12, 281-300. Kanbur, R. and M. Keen (1993). Jeux sans fronti`eres: Tax competition and tax coordination when countries differ in size. American Economic Review 83, 877-892. Keen, M. and S. Lahiri. (1998). The Comparison Between Destination and Origin Principles Under Imperfect Competition, Journal of International Economics 45, 323-350. Lockwood, B. (1993). Commodity tax competition under destination and origin principles. Journal of Public Economics 53, 141-162. Lockwood, B. (2001). Tax competition and tax co-ordination under destination and origin principles: a synthesis, Journal of Public Economics 81, 279-319. Mankiw, N. G. and M. D. Whinston. (1986). Free Entry and Social Inefficiency, The Rand Journal of Economics 17, 48-58. Mintz, J. and H. Tulkens (1986). Commodity tax competition between member states of a federation: Equilibrium and efficiency. Journal of Public Economics 29, 133-172. [15] Venables, A. J. (1985). Trade and Trade Policy with Imperfect Competition: The Case of Identical Products and Free Entry, Journal of International Economics 19, 1-19