Restricted Origin Principle
The discussion in this chapter is organized in a similar way as the analysis of the restricted destination principle in Chapter 4. Section 5.1 develops the three-country three-good model required for a discussion of the restricted origin principle. The comparative statics analysis in section 5.2 is based on a simplified model, assuming that tax policy in the union countries does not affect relative prices in the rest of the world. This assumption is relaxed in section 5.3 and the effects of tax policy change are derived in this more general setting. In a supplement to the main course of the analysis, section 5.4 discusses the specific issues and problems that arise when trade deflection is allowed in a three-country model. The theoretical analysis of alternative tax principles is summarized in section 5.5.
KeywordsTransportation Income Librium Rium
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- 1.Lloyd (1982) compares four different customs union models and shows that differing conclusions are due mostly to diverse assumptions concerning the trilateral pattern of trade. His discussion includes (p. 50) a systematic enumeration of ‘permissible’ trade patterns in 3 × 3 models. Cf. also Wooton (1986), who derives comparative static results from a three-country customs union model under alternative trade patterns.Google Scholar
- 2.Krause-Junk (1990, pp. 258–259) discusses the possibility that trade deflection through the low-tax union country occurs only on paper while goods are shipped directly from the rest of the world to the high-tax union member. In this case, transportation costs are no higher than for direct trade. However, given some cooperation between EC member states, legal and administrative measures could be devised in order to raise the costs of engaging in this form of tax fraud. As an example, the status of a VAT-registered trader could be denied to ‘mail-box firms’ in the low-tax union country, which have no storage or other facilities.Google Scholar
- 4.Berglas (1981, p. 379) emphasizes that the neutrality results derived in his analysis are independent of the direction of trade flows. Therefore, his results can be reproduced here even though we employ a different trade pattern.Google Scholar
- 7.This case is labelled the ‘Riezman pattern’ by Lloyd (1982, p. 50). Note that a pure relabelling of goods in Figure 5.1 does not lead to a different trade pattern. Therefore, there are effectively only two symmetric trade patterns in a 3 × 3 trade model.Google Scholar
- 12.Recall the discussion of national tax bases in section 5.1. Note also that this general equilibrium effect would be eliminated if all income effects were set equal to zero (Keen, 1989).Google Scholar
- 14.This implies that the tax rebate is not confined to goods which were produced in country B. Effectively, a scenario of unlimited trade deflection assumes that tax authorities in the high-tax union country cannot discriminate between indigenous products and foreign-produced goods, which cross the country (physically or on paper) solely to take advantage of the higher tax rebate. This is consistent, however, with the assumption of homogeneous goods which has been made throughout the analysis of this chapter.Google Scholar
- 15.This is already indicated in Shibata (1967, p. 223) who argues that “...a sort of revolving trade equilibrium will be established” in the case of trade deflection.Google Scholar