Consumption and Cash-Flow Taxes in an InternationalSetting

We model the effects of consumption-type taxes which differ according to the base andlocation of the tax. Our model incorporates a monopolist producing and selling in twocountries with three sources of rent, each in a different location: a fixed factor (locatedwith production), mobile managerial skill, and a monopoly mark-up (located withconsumption). In the general case, we show that for national governments, there aretradeoffs in choosing between alternative taxes. In particular, a cash-flow tax on asource basis creates welfare-impairing distortions to production and consumption, butis incident on the owners of domestic production who may be non-resident. By contrast,a destination-based cash-flow tax does not distort behavior, but is incident only ondomestic residents. In the alternative case of perfect competition, with the returns to thefixed factor accruing to domestic residents, the only distortion from the source-basedtax is through the allocation of the mobile managerial skill. In this case, the sourcebasedtax is also incident only on domestic residents, and is dominated by an equivalenttax on a destination basis, or by a sales tax.[...]