Country characteristics and preferences over tax principles

Abstract

The European Union has long maintained an intention to move to the origin principle of taxation, but no progress has been made since the completion of the single market. The lack of progress seems surprising, given the significant support for the origin principle in the economic literature. However, there is a contrast between the European Union that contains countries of widely different sizes and productivity levels, and the theoretical literature that has focused on models with symmetrical countries. We extend the modelling of preferences over tax principles to incorporate asymmetries in efficiency and size. We show that asymmetry can cause disagreement among countries over tax principles to be sustained even with close economic integration. Large countries and inefficient countries are shown to prefer the origin principle. In contrast, small countries and efficient countries can have a preference for the destination principle. These results provide an insight into the political economy of the impasse in European Union tax policy.