Gains from Trade in Government Revenue and Pareto-Efficient International Taxation

This paper uses the concept of gains from trade in government revenue to clarify and extend the analysis of Keen and Wildasin (2004). It shows that their results derive from the use of trade taxes to achieve gains from trade in revenue in circumstances when direct international transfers cannot be used for this purpose. The paper shows that, in such circumstances, Pareto-efficient international equilibria are globally production-inefficient only in special cases, but origin-based commodity taxes, source-based capital taxes, and taxes on trade are nevertheless typically part of a Pareto-efficient international tax system. However, this conclusion depends on ruling out the use of international transfers to trade revenue, the case for which is not compelling.