Origin Vs Destination commodity Taxation with Heteregeneous Agents

Abstract In this paper, we set up a model allowing the comparison between origin and destination commodity taxation when there are distortions created by monopolistic competition. In this setting firms produce competitively, differentiated goods that are part of international trade using skilled and unskilled labours. The level of tax in one country affects the levels of wages of the skilled labor in the overall economy, thus the relocation of firms between countries and the return to capital. We make a comparison between destination and origin principles under monopolistic competition and show that the choice between origin and destination tax principle in this setting depends on which between high skilled or low skilled labors is used intensively, to be more accurate, when the ratio of the skilled labor intensity factor over the elasticity of substitution between any two variety is smaller than one-half, then the tax rate is higher (less subsidy) under the origin principle, whereas the opposite is true when the previous ratio exceeds one-half. JEL Classifications: D43. F12. H21 .