International Tax and Public Finance

, Volume 22, Issue 5, pp 811–833 | Cite as

The choice of commodity tax base in the presence of horizontal foreign direct investment



We analyse the choice of commodity tax base, when countries set their taxes non-cooperatively in a reciprocal dumping model of homogeneous goods trade with horizontal foreign direct investment (FDI). We show that the consumption base (destination principle) weakly welfare-dominates the production base (origin principle) for a large range of plant fixed costs. When integration is complete, the destination principle dominates the origin principle for all levels of plant fixed costs below which FDI occurs under the origin principle. This contrasts with much of the existing literature which has tended to support the origin principle under imperfect competition with a fixed market structure.


Commodity taxation Trade Imperfect competition Foreign direct investment Economic integration 

JEL Classification

F12 H20 


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Copyright information

© Springer Science+Business Media New York 2014

Authors and Affiliations

  1. 1.University of HullHull UK

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