Efficient tax competition under the origin principle

• DOI: http://doi.org/10.1111/jpet.12262
• Author: Stéphane Gauthier
• Date: 01 February 2018
• Published date: 01 February 2018

Received: 21 March 2016 Accepted: 14 May 2017

DOI: 10.1111/jpet.12262

ARTICLE

Efficient tax competition under the origin principle

Stéphane Gauthier

ParisSchool of Economics and University of

Paris 1

StéphaneGauthier, PSE and University

ofParis 1, 48 bd Jourdan, Paris, France

(stephane.gauthier@univ-paris1.fr).

Iam grateful to France Strategie for funding this

researchwithin the framework of a Research

Projecton the “Evolution of the Value Created

bythe Digital Economy and Its Fiscal Conse-

quences.”I have benefited from comments of M.

Baccache,P.Belleflamme, P. J.Benghozi, F. Bloch,

M.Bourreau, B. Caillaud, J. Cremer, G. Demange,

L.Gille, J. Hamelin, N. Jacquemet, E. Janeba, L.

Janin,J. M. Lozachmeur, and two anonymous

refereesof this Journal. Special thanks go to A.

Secchiand J. P.Tropeano for very helpful discus-

sions.The usual disclaimers apply.

This paper studies fiscal competition under the origin principle. It

identifies a pattern of consumers’ taste heterogeneity under which

the first-best world social optimum arises as a noncooperative Nash

equilibrium. Consumers’ tastes are characterized by the strength of

their preference for home and foreign goods. Nash implementation

of the first-best obtains when in every tax jurisdiction the number

of consumers who display a home bias (those consumers who pre-

fer purchasing the home good to shopping abroad at equal prices)

equals, for every magnitude of the home bias, the number of con-

sumers who display an “import bias” (those who instead prefer shop-

ping abroad) equal in magnitude.

1INTRODUCTION

Principles of international commodity taxation refer to the physical attributes of the commodities as well as buyers’

and sellers’ locations. The two main principles provide for tax levy where commodities are produced (origin princi-

ple) or consumed (destination principle). Although the origin principle is applied widely (it currently applies within

the United States through the “use tax” and it was also ruling EU transactions until January 2015), it is often found

dominated by the destination principle in the academic literature. Pioneering studies by Mintz and Tulkens(1986),

Kanbur and Keen (1993), or Lockwood (2001) indeed identified under the origin principle a race to the bottom that

leads to setting inefficiently low taxes in the attempt to attract foreign tax bases. Our paper shows that the inef-

ficiency of tax competition arising under this principle crucially relates to the form taken by the heterogeneity of

consumers.

In general,the academic literature assumes that consumers differ according to a home bias due to mobility or trans-

action costs when shopping abroad. There is indeed empirical evidence to support such a kind of bias (recent stud-

ies include Ellison & Ellison, 2009; Cosar, Grieco, & Tintelnot, 2015). However, one may think of cases where this

bias is less likely to arise, and instead a “country-of-origin” effect should operate (Riefler & Diamantopoulos, 2009).

Country-of-origin effects are especially relevant when the country of origin acts as branding, e.g., Swiss watches,

German engineering, French wine, Kentucky bourbons, Cuban cigars, Italian shoes, or Belgian chocolate. Then some

consumers display an “import bias” reflected by a preference for purchasing foreign-branded goods. In these exam-

ples, a single particular variety tends to be regarded as superior to its competitors, but more complicated pat-

terns are possible. For instance, in the industry of cultural goods studied by François and van Ypersele (2002), U.S.

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