Harmonizing fiscal policy: Indirect taxes and global public goods

Abstract

This article focuses on the welfare effects of the interaction of a rule of indirect tax harmonization under the destination principle and the provision of public goods that are global in nature. It stresses the role of international transfers between governments set in order to equalize the social (i.e., worldwide) marginal cost of public funds across countries. Under this condition, it is shown how the combination of the tax and expenditure side of such a “harmonizing fiscal policy” can give rise to a potential Pareto improvement. This requires considering aggregate revenue effects (and the ensuing effects on the provision of public goods) of the fiscal reform jointly with under/over provision of public goods in the (first-best) Samuelson sense.