Commodity tax competition and industry location underthe destination- and the origin-principle

We develop a model of commodity tax competition with monopolistically competitive internationallymobile firms, transport costs, and asymmetric country sizes. We investigate the impacts of noncooperativetax setting, as well as of tax harmonization and changes in the tax principle, in both theshort and the long run. The origin principle, when compared to the destination principle, is shown toexacerbate tax competition and to erode tax revenues, yet leads to a more equal spatial distribution ofeconomic activity. This suggests that federations which care about spatial inequality, like the EuropeanUnion, face a non-trivial choice for their tax principle that goes beyond the standard considerations oftax revenue redistribution....