The choice of commodity tax base in the presence of horizontal foreign direct investment

Abstract

We analyse the choice of commodity tax base, when countries set their taxes non-cooperatively in a reciprocal dumping model of homogeneous goods trade with horizontal foreign direct investment (FDI). We show that the consumption base (destination principle) weakly welfare-dominates 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 structure.

Trade costs and the choice of international commodity tax base revisited: The role of transboundary pollution

“…In contrast, large countries and inefficient countries are shown to prefer the origin principle. McCracken () extends the model of Haufler et al . () to allow for horizontal foreign direct investment.…”

“…In contrast, large countries and inefficient countries are shown to prefer the origin principle. McCracken (2015) extends the model of Haufler et al (2005) to allow for horizontal foreign direct investment. McCracken (2015) shows that when integration is complete, the destination principle is superior to the origin principle for all levels of plant fixed costs below which foreign direct investment occurs under the origin principle.…”

“…McCracken (2015) extends the model of Haufler et al (2005) to allow for horizontal foreign direct investment. McCracken (2015) shows that when integration is complete, the destination principle is superior to the origin principle for all levels of plant fixed costs below which foreign direct investment occurs under the origin principle. Fujiwara (2016) finds that if the reforming country imposes an import tax, its reduction and an increase in the consumption tax (a decrease in the production tax) that leave the world price constant attain a strict Pareto deterioration (improvement).…”

Trade and commodity taxes as environmental instruments in an open economy

“…Similarly, the strategic use of environmental policy instruments (if successfully enforced) may be effective when production is the main source of pollution, but they may not be applicable when consumption is considered to be the main source of pollution. 3 As internationally traded commodities are taxed mostly where they are consumed (e.g., see McCracken and Stähler, 2010;McCracken, 2015), and as countries can freely set their commodity taxes, when consumption is the main source of externality, commodity taxes can be used strategically (just like the strategic use of trade policy tools) even in the case of a free trade agreement. The strategic role of commodity taxes as environmental instruments when consumption of an imported product generates pollution and the implications of the strategic use of this policy instrument on countries' integration through international trade have not yet received much attention in the literature.…”