Tax Principles and Tariff‐Tax Reforms under International Oligopoly

• Published date: 01 February 2016
• Author: KENJI FUJIWARA
• DOI: http://doi.org/10.1111/jpet.12140
• Date: 01 February 2016

TAX PRINCIPLES AND TARIFF-TAX REFORMS UNDER

INTERNATIONAL OLIGOPOLY

KENJI FUJIWARA

Kwansei Gakuin University

Abstract

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.

1. Introduction

This paper compares destination-based consumption taxes and origin-based production

taxes in a context of tariff-tax reforms and imperfect competition.1Rapid growth of

world trade led by reductions in trade protection is expected to benefit the world as

well as each individual country.2However, there is still hesitation to liberalize trade.

One main reason is that developing countries are concerned about expected losses in

trade tax revenue that has a large share in total government revenue.3Resistance to

trade liberalization is also present in developed countries since it inevitably leads to an

uneven income distribution, as the factor endowment theories, for example the specific-

factors model and the Heckscher–Ohlin model, suggest.4

1We interchangeably use two terminologies, a “destination-based tax” (resp. “origin-based tax”) and a

“consumption tax” (resp. “production tax”) unless any confusion arises.

2Baier and Bergstrand (2001, p. 22) find evidence that “tariff reductions still explain three times as

much trade growth as transport-cost declines.” Love and Lattimore (2009, p. 60) estimate welfare gains

from tariff reductions.

3International Monetary Fund (2005, p. 3) reports this trend, concluding that “trade tax revenue typ-

ically constitutes between one-quarter and one-third of total tax revenue in low- and middle-income

countries.” In addition, Baunsgaard and Keen (2010) find that revenue recovery fails in low-income

countries.

4See, for example, chapters 4 and 5 in Krugman, Obstfeld, and Melitz (2010).

Kenji Fujiwara, School of Economics, Kwansei Gakuin University, Uegahara 1-1-155, Nishinomiya,

Hyogo, 662-8501, Japan (kenjifujiwara@kwansei.ac.jp).

I thank two anonymous referees, an associate editor, and John Conley for a number of helpful com-

ments. In particular, Section 4 is entirely indebted to the referees’ suggestions.

Any remaining error is my own.

Received June 18, 2014; Accepted September 22, 2014.

C2014 Wiley Periodicals, Inc.

Journal of Public Economic Theory, 18 (1), 2016, pp. 84–98.

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