Commodity Tax Harmonization in the European Community: A General Equilibrium Analysis of Tax Policy Options in the Internal Market

222 Pages·1993·4.336 MB·English

by  Dr. Andreas Haufler (auth.)

Studies in Contemporary Economics
Editorial Board
D.Bos
B. Felderer
B. Gahlen
H. J. Ramser
K. W. Rothschild
Andreas Haufler
Commodity
Tax Harmonization
in the
European Community
A General Equilibrium Analysis
of Tax Policy Options
in the Internal Market
With 15 Figures
Springer-Verlag Berlin Heidelberg GmbH
Or. Andreas Haufler
Faculty of Economics and Statistics
University of Konstanz
P.O.Box 5560
0-78434 Konstanz, FRG
ISBN 978-3-7908-0714-1
Die Deutsche Bibliothek - CIP·Einheitsaufnahme
Haufler, Andreas:
Commodity tax harmonization in the European Community :
a general equilibrium analysis of tax policy options in the internal market I
Andreas Haufler. - Heidelberg : Physica·Verl., 1993
(Studies in contemporary economics)
ISBN 978-3-7908-0714-1 ISBN 978-3-642-58071-0 (eBook)
DOI 10.1007/978-3-642-58071-0
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Originally published by Physica-Verlag Heidelberg New York in 1993
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Preface
This book has been written while the author was a member of the long-term research
program "Internationalization of the Economy" (Sonderforschungsbereich 178) at
the University of Konstanz. Its subject, the harmonization of commodity taxes in
the European Community's internal market, has been intensely - and controversially
- debated among both economists and legal scholars. The interdisciplinary contacts
in the research program have contributed to the shape of the present study, even
though the analysis is confined to the economic aspects involved.
lowe sincere thanks to my academic teacher, Professor Bernd Genser, who con
stantly supported this work with both general advice and detailed comments and
who created within his research unit a stimulating and cooperative environment.
Professor Albert Schweinberger shared some of his expertise on trade issues with me
and made a number of valuable suggestions. I am also grateful to Professor Hans
Jurgen Vosgerau for his successful efforts to create favorable working conditions, and
for support on several occasions.
I have further benefitted from discussions with both members and non-members
of the research program in Konstanz. Helpful comments and suggestions were re
ceived from Max Albert, Professor John Chipman, Karl-Josef Koch, Professor Wil
helm Kohler, Jurgen Meckl, Gunther Schulze, Professor John Whalley, and Professor
Wolfgang Wiegard. Stefan Menner introduced to me the legal perspective on tax har
monization and helped me to overcome at least some of the barriers of specialization.
The numerical analysis owes much to Professor John Piggott, who provided a first
orientation in the field of computable general equilibrium modelling, and to Profes
sor Thomas Rutherford for the permission to use his MPS/GE software. Last but
not least, I thank Franz Baumann who always found a solution when the computer
did not do what I expected.
Konstanz, April 1993 Andreas Haufler
Contents
Introduction 1
1 The Policy Setting 7
1.1 Basic Concepts of International Taxation 7
1.2 The Harmonization Process in the EC . 11
1.2.1 Value-Added Taxation with Border Controls 11
1.2.2 Value-Added Taxation in the Internal Market 15
1.3 Feasible International Tax Principles 21
2 Theoretical Aspects 29
2.1 Introduction: Domestic Taxes and Foreign Trade. 29
2.2 Trade Distortions vs. Domestic Efficiency. 32
2.3 Fiscal vs. Political Externalities . . . . . . 35
2.4 Optimal Taxation vs. Tax Reform Analysis . 41
2.5 Application to EC Policy Issues . . . . . 43
3 A Dual General Equilibrium Framework 47
3.1 The Trade Model and its Assumptions ·47
3.2 Dual Functions and their Properties. . 49
3.3 Introducing General Commodity Taxes 53
3.4 General Tax Principles . . . . . . . . 56
3.4.1 General Destination Principle 56
3.4.2 General Origin Principle . . . 57
Vlll
4 Restricted Destination Principle 59
4.1 The Two-Country Model . . . . 59
4.2 Tax Reform and Terms of Trade Changes. 63
4.3 Introducing Changes in the Tax Base . 68
4.4 Global Welfare Effects of Tax Reform . 73
5 Restricted Origin Principle 77
5.1 The Three-Country Model ..... . 77
5.2 Tax Reform in the Small-Union Case 82
5.2.1 The Basic Trade Pattern .. 83
5.2.2 Alternative Trade Patterns. 86
5.3 Tax Reform with Endogenous World Prices. 90
5.3.1 Simplifying Assumptions 91
5.3.2 Relative Price Effects . . 93
5.3.3 National Welfare Effects 98
5.4 Supplement: Trade Deflection . · 102
5.5 Summary: The Limitations of Theoretical Analysis · 104
6 Alternative Tax Principles: A Numerical Comparison 107
6.1 The Empirical Model 109
6.2 The Data Base ... 111
6.2.1 Deriving the Benchmark Data Set .. · III
6.2.2 Functional Forms and Elasticity Estimates · 117
6.3 Simulation Results for Homogeneous Goods · 119
6.3.1 Measuring Welfare Change ..... . · 119
6.3.2 Welfare Effects of a Switch in the Tax Base · 121
6.3.3 Welfare Effects of a Change in Tax Rates · 125
6.3.4 Overall Effects of a Change in the Tax Principle · 130
6.3.5 Sensitivity Analysis ......... . · 131
6.4 Extending the Model: Differentiated Goods . 133
6.4.1 Changes in the Model and the Data Base. 133
IX
6.4.2 Simulation Results for Differentiated Goods · 138
6.5 A Second-Best Tax Principle for the EC · 144
7 Tax Rate Harmonization 147
7.1 Public Goods in the Dual Framework · 148
7.2 Heterogeneous Preferences for Public Goods · 151
7.3 Tax Competition and Public Good Supply · 160
7.3.1 Tax Reform in One Country .... · 160
7.3.2 Alternative Views of Government Behavior. · 167
7.3.3 A Brief Survey of Empirical Results. · 172
7.4 Optimal Tax Rate Harmonization in the EC · 175
8 Summary and Outlook 179
8.1 Summary: Evaluating the Policy Choices · 179
8.1.1 Results of the Study . . . . . . . · 179
8.1.2 Welfare Analysis and International Tax Policy · 183
8.2 Outlook: International Capital Movements · 185
Appendix 189
Appendix A: Derivation of Selected Equations · 189
Appendix B: MPS/GE Simulation Results · 195
Appendix C: List of Symbols Used .201
Bibliography 203
List of Tables
1.1 Principles for International Commodity Taxation (Single-Stage Tax). 8
1.2 Comparison of International Tax Principles (Multi-Stage Tax) 11
1.3 Value-Added Tax Rates in EC Member States (1987) 15
1.4 Tax Revenues in EC Member States. . . . . . . . 17
1.5 Effects of Alternative Second-Best Tax Principles 27
2.1 Trade Distortions and Heterogeneous Preferences 35
2.2 Fiscal vs. Political Externalities ......... . 40
4.1 Restricted Destination Principle and Trade Policies 63
4.2 Welfare Effects under the Restricted Destination Principle 73
5.1 Welfare Effects under the Restricted Origin Principle (I) . 90
5.2 Relative Price Effects under the Restricted Origin Principle. 98
5.3 Welfare Effects under the Restricted Origin Principle (II) . 101
6.1 Gross Domestic Product by Region (1987) . . 112
6.2 National Accounting Classification of Goods . 113
6.3 International Trade Classification of Goods. . 113
6.4 Benchmark Data Set: Homogeneous Goods (1987) . 115
6.5 Input Coefficients by Sector and Region ..... . 116
6.6 Subst!tution Elasticities in Single-Stage Functions . 118
6.7 Homogeneous Goods (I): Switch in Tax Base (bill. US-$) . 124
6.8 Homogeneous Goods (II): Change in Tax Rates (bill. US-$) . . 128
6.9 Homogeneous Goods (III): Overall Welfare Effects. . . . 130
6.10 Change in Tax Rates - Sensitivity Analysis (O"G = 0.1) . 132
xii
6.11 Benchmark Data Set: Differentiated Goods (1987) . . 135
6.12 Substitution Elasticities in Nested Utility Functions . 137
6.13 Differentiated Goods (I): Switch in Tax Base (bill. US-$) . 138
6.14 Differentiated Goods (II): Change in Tax Rates (bill. US-$) . . 140
6.15 Differentiated Goods (III): Overall Welfare Effects. . . . . 142
7.1 Global Welfare Effects and Preferences for Public Goods . 157
7.2 National Welfare Effects with Public Goods ....... . 166
List of Figures
1.1 Taxation of Trade under the Restricted Destination Principle. 23
1.2 Taxation of Trade under the Restricted Origin Principle 26
2.1 Externalities in Government Relations ...... . . . . . . . . . .. 36
4.1 Terms of Trade Effects of a Tax Change ........ 67
4.2 Tax Base and Terms of Trade Effects of a Tax Change 72
5.1 The Basic Trade Pattern (I) 79
5.2 Symmetric Trade Pattern (II) 86
5.3 Asymmetric Trade Pattern (III) 87
5.4 Trade Flows with Deflection · 103
6.1 The Basic Trade Pattern . . ......... · 110
6.2 Welfare Effects of a Switch in the Tax Base · 122
6.3 Welfare Effects of a Change in Tax Rates . . · 126
7.1 Costs and Benefits of Public Goods in a First-Best Setting · 150
7.2 Tax Rate Harmonization with Heterogeneous Preferences · 159
7.3 Fiscal vs. Political Externalities and Public Good Supply · 172