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Consumption and cash-flow taxes in an International setting

Auerbach, Alan J. and Devereux, Michael P. (2010) Consumption and cash-flow taxes in an International setting. Public Economics Programme Papers, PEP 03. The London School of Economics and Political Science, Suntory and Toyota International Centres for Economics and Related Disciplines, London, UK.

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Identification Number: PEP 03

Abstract

We model the effects of consumption-type taxes which differ according to the base and location of the tax. Our model incorporates a monopolist producing and selling in two countries with three sources of rent, each in a different location: a fixed factor (located with production), mobile managerial skill, and a monopoly mark-up (located with consumption). In the general case, we show that for national governments, there are tradeoffs in choosing between alternative taxes. In particular, a cash-flow tax on a source basis creates welfare-impairing distortions to production and consumption, but is 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 on domestic residents. In the alternative case of perfect competition, with the returns to the fixed factor accruing to domestic residents, the only distortion from the source-based tax is through the allocation of the mobile managerial skill. In this case, the sourcebased tax is also incident only on domestic residents, and is dominated by an equivalent tax on a destination basis, or by a sales tax.

Item Type: Monograph (Report)
Official URL: http://sticerd.lse.ac.uk/
Additional Information: © 2010 The Authors
Subjects: H Social Sciences > HB Economic Theory
Sets: Research centres and groups > Suntory and Toyota International Centres for Economics and Related Disciplines (STICERD)
Date Deposited: 21 Jul 2014 14:14
Last Modified: 21 Jul 2014 14:14
Projects: RES-060-25-0033
Funders: Economic and Social Research Council
URI: http://eprints.lse.ac.uk/id/eprint/58056

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