The choice of commodity tax base in the presence o

Authors: Scott McCracken

Publish Date: 2014/07/13

Volume: 22, Issue: 5, Pages: 811-833

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Abstract

We analyse the choice of commodity tax base when countries set their taxes noncooperatively in a reciprocal dumping model of homogeneous goods trade with horizontal foreign direct investment FDI We show that the consumption base destination principle weakly welfaredominates the production base origin principle for a large range of plant fixed costs When integration is complete the destination principle dominates the origin principle for all levels of plant fixed costs below which FDI occurs under the origin principle This contrasts with much of the existing literature which has tended to support the origin principle under imperfect competition with a fixed market structureThanks to Frank Stähler for pointing me in the right direction in the early stages of this paper Thanks also to Martin Richardson Chris Jones José RodriguesNeto participants of the Research School of Economics’ Brown Bag seminar at Australian National University and two anonymous referees for their helpful comments and suggestions All remaining errors are my own

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