"Tax Policy Design in a Globalized Economy : A Comparative Analysis of Destination and Origin Principles"

Abstract : This paper examines the optimal structure of commodity taxation in an open
economy characterized by firm mobility and labor market segmentation. We develop a
two-country general equilibrium model with monopolistic competition, endogenous firm
relocation, and a dual labor market in which skilled workers earn flexible wages while
unskilled workers face wage rigidity. Within this framework, we compare the welfare
implications of two competing tax principles : the destination principle (taxation at the
point of consumption) and the origin principle (taxation at the point of production).
Our central finding is the existence of a threshold condition : when the share of
production income accruing to skilled labor exceeds 50%, the origin principle Pareto
dominates in a non-cooperative setting ; otherwise, the destination principle yields
superior outcomes. This result offers a tractable, empirically grounded decision rule
based on observable labor market parameters and sheds new light on the design of
international tax coordination mechanisms.