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Destination‐based vs. Origin‐based Commodity Taxation in Large Open Economies with Unemployment
Author(s) -
Antoniou Fabio,
Hatzipanayotou Panos,
Tsakiris Nikos
Publication year - 2019
Publication title -
economica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.532
H-Index - 65
eISSN - 1468-0335
pISSN - 0013-0427
DOI - 10.1111/ecca.12235
Subject(s) - economics , consumption (sociology) , unemployment , nash equilibrium , commodity , general equilibrium theory , monetary economics , microeconomics , international economics , macroeconomics , market economy , social science , sociology
We construct a perfectly competitive model of two symmetric countries producing tradable commodities and a public consumption good. Destination‐ or origin‐based taxes are levied on the consumption of the tradable goods. In both countries, a fixed wage leads to involuntary unemployment. We derive the Nash equilibrium consumption taxes under the two taxation principles with endogenous world prices, and compare them to (i) the cooperative rates, and (ii) the rates when world prices are fixed. We demonstrate that with endogenous world prices, the induced terms‐of‐trade effects cancel out under the destination principle, but they prevail under the origin principle of taxation. Nash equilibrium destination‐based taxes are inefficiently low when the exporting sector in each country is non‐labour‐intensive. The Nash equilibrium origin‐based taxes can be either higher or lower than the corresponding cooperative rates.