COMMODITY TAX HARMONISATION WITH PUBLIC GOODS- AN ALTERNATIVE PERSPECTIVE

Paper number: 95/03

Paper date: February 1995

Year: 1995

Paper Category: Discussion Paper

Authors

Ben Lockwood**
University of Exeter and CEPR*

Abstract

This paper investigates whether it is possible to find Pareto- improving commodity tax reforms that harmonise taxes between two countries when governments supply public goods and thus have revenue requirements. It is shown that, with two goods, and starting from Nash equilibrium taxes, any harmonising reform will always make both countries worse off (better off) if the imported good is taxed less heavily (more heavily) than the exported good by both countries. An example suggests that harmonisation is unlikely to be Pareto-improving if the revenue requirement is high, and the demand for imports is relatively price elastic. An alternative definition of harmonisation, difference harmonisation, which may yield Pareto-improvements under more general conditions is proposed.

JEL Classification numbers: 023,410,321.
Keywords: commodity tax reform, tax harmonisation.

* Mailing Address: Prof.B.Lockwood, Department of Economics, University of Exeter, Exeter EX4 4RJ, Devon, UK.
Phone: +44 1392 263219 Fax: +44 1392 263242
** This paper was written whilst visiting the Economic Policy Unit at Copenhagen Business School. I would like to thank them for their hospitality. Comments from seminar participants at EPRU and University fo Warwick are also gratefully acknowledged.