CAN INTERNATIONAL COMMODITY TAX HARMONIZATION BE PARETO-IMPROVING WHEN GOVERNMENTS SUPPLY PUBLIC-GOODS

This paper investigates whether it is possible to find Pareto-improvin g commodity tax reforms that harmonise taxes between two countries whe n governments supply public goods and thus have revenue requirements. We consider a Ricardian model of trade with elastic factor supply, and suppose that initial taxes are Nash equilibrium ones. Under weak cond itions, a necessary and sufficient condition for a tax reform to be Pa reto improving is that it increases the value of compensated (utility constant) demand for imports in both countries. A two-good example sug gests that harmonisation is unlikely to be Pareto-improving if the rev enue requirement is high, and the demand for imports is relatively pri ce elastic, in both countries. (C) 1997 Elsevier Science B.V.