Tax competition in the presence of environmental spillovers

This paper examines the efficiency of destination-and origin-based consumption taxes, in the presence of consumption generated perfect cross-border pollution spillovers, when tax revenue either finances public pollution abatement or it is lump-sum distributed. When consumption tax revenue finances the provision of public pollution abatement and regions have identical and quasi-linear preferences then, the non-cooperative equilibrium origin-based consumption taxes are efficient, while the destination-based consumption taxes are inefficiently low. When, however, consumption tax revenue is lump-sum distributed, then, the destination-based tax principle leads to inefficiently low taxes, while the origin-based tax principle leads either to inefficiently high or low taxes.