TAX PRINCIPLES AND TARIFF-TAX REFORMS UNDER INTERNATIONAL OLIGOPOLY

In a two-country duopoly model, this paper compares destination- and origin-based commodity taxes adjusted to tariff reductions so that the world price and foreign welfare remain unaltered. We first find that this tariff-tax reform reduces domestic welfare under the destination principle while the opposite holds under the origin principle. Then, it is shown that this ranking is reversed if exports are taxed. In short, which is preferable between destination and origin taxes depends on the tax principle and which between imports and exports are taxed.