Commodity Tax Harmonization with Public Goods - An Alternative Perspective

Ben Lockwood

No 1304, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This paper investigates whether it is possible to find Pareto-improving commodity tax reforms that harmonize taxes between two countries when governments supply public goods and thus have revenue requirements. To focus on the basic issues, we consider a Ricardian model of trade with elastic factor supply and two traded goods, and suppose that initial taxes are Nash equilibrium ones. This allows a complete characterization of the conditions under which Pareto-improving reforms exist using simple geometric arguments. These conditions are completely determined by: (i) the configuration of initial taxes across countries; and (ii) whether the two goods are substitutes or complements. An example suggests that harmonization is unlikely to be Pareto-improving if the revenue requirement is high, and the demand for imports relatively price elastic, in both countries. An alternative definition of harmonization, difference harmonization, which may yield Pareto-improvements under more general conditions, is proposed.

Keywords: Commodity Tax Reform; Tax Harmonization (search for similar items in EconPapers)
JEL-codes: H21 H41 H87 (search for similar items in EconPapers)
Date: 1995-12
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Citations: View citations in EconPapers (3)

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Working Paper: Commodity Tax Hamonisation with Public Goods - An Alternative Perspective (1995)
Working Paper: Commodity Tax Harmonisation with Public Goods - an Alternative Perspective
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