An efficiency analysis of consumption and production taxation with an application to value-added taxation

The usual arguments pro destination-based, consumption-oriented or pro orig in-based, production-oriented VAT are found wanting. They largely ignore ta x effects on locational choices of firms. This paper provides a comparison of consumption and production taxation within a model of firm and household mobility. It is shown that the case for consumption taxation becomes stron ger when profit taxes are not available. The consumption tax is the more ta rgeted instrument when households are to be induced to locate efficiently. It is argued that, with border controls lacking, the alternative option sho uld be seen more in a wage tax and less in a production tax.