International Oligopoly and the Taxation of Commerce with Revenue‐Constrained Governments

Abstract

We evaluate the incentives for strategic commodity tax‐setting under destination and origin regimes when competition is imperfect and commodity taxes must be used to finance the government budget. Different cases of international duopoly are compared, where firms compete over quantities or prices and markets are segmented or integrated. In each setting the international spillovers of tax policy are isolated and evaluated at the Pareto‐efficient tax rate. We find that origin‐based commodity taxation leads to a downward competition of tax rates in each of the models analysed, whereas no similarly broad‐based incentives for beggar‐thy‐neighbour policies exist under the destination principle.

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