The Origin Principle and the Welfare Gains from Indirect Tax Harmonization

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This paper establishes a parallelism between indirect tax harmonization when taxes are levied according to the destination principle and its counterpart when taxes are imposed on an origin basis. Using a simple two-country model of international trade it is argued that, under "normal" circumstances, indirect tax harmonization under the origin principle, considered as a movement of domestic taxes toward an appropriately designed average tax structure, is potentially Pareto improving. It is also shown that if the initial position is a Nash equilibrium, there are "exceptional" situations under which the above-mentioned reform may generate an actual Pareto improvement, so that both countries improve their welfare without any need for a compensating international transfer.
Original languageEnglish
Pages (from-to)83-93
JournalInternational Tax and Public Finance
Issue number1
Publication statusPublished - 1 Jan 1996


  • Indirect tax harmonization
  • Origin principle


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