Imperfect Competition, Indirect Tax Harmonization and Public Goods.
Paper number: 05/01
Paper date: December, 2004
Paper Category: Working Paper
Christos Kotsogiannis and Miguel-Angel Lopez-Garcia
In a recent contribution Keen, Lahiri and Raimondos-MØller (2002) (European Economic Review, 46, 1559-1568), in a model of imperfect competition with no revenue eﬀects, show that tax harmonization under the destination principle always makes one country better oﬀ and maybe Pareto-improving, whereas under the origin principle, and under certain circumstances, it leads to a strict Pareto-worsening. This paper shows that the welfare implications of (destination- and origin-based) tax harmonization are, in general, indeterminate when public goods are present. A consequence of this is that the choice of the tax principle and the harmonization of tax rates across countries can be considered in isolation.