Indirect tax harmonization and global public goods
This paper identifies conditions under which, starting from any tax-distorting equilibrium, destination- and origin-based indirect tax-harmonizing reforms are potentially Pareto improving in the presence of global public goods. The first condition (unrequited transfers between governments) requires that transfers are designed in such a way that the marginal valuations of the global public goods are equalized, whereas the second (conditional revenue changes) requires that the change in global tax revenues, as a consequence of tax harmonization, is consistent with the under/over-provision of global public goods relative to the (modified) Samuelson rule. Under these conditions, tax harmonization results in redistributing the gains from a reduction in global deadweight loss and any changes in global tax revenues according to the Pareto principle. And this is the case independently of the tax principle in place (destination or origin).
KeywordsOrigin principle Destination principle Indirect tax harmonization Reform of commodity taxes Global/local public goods
JEL ClassificationF15 H21 H41 H87
We thank two anonymous referees and the editor of the journal for comments and advice on an earlier version of this paper. We also thank Paulina Navrouzoglou for insightful discussions and seminar participants at Athens University of Economics and Business and the XVIII Encuentro de Economia Publica held at the University of Malaga for comments. Any remaining errors are of course ours. This is a version of an earlier paper circulated as ‘Does indirect tax harmonization deliver Pareto improvements in the presence of global public goods?’ Financial support from the Catalan Government Science Network (2009SGR-600 and XREPP) and the Spanish Ministry of Education and Science Research Project (ECO2009-10003) is gratefully acknowledged (Kotsogiannis and Lopez-Garcia).
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