Domestic tax reform and international oligopoly

Abstract

This paper examines the strategic use of domestic tax instruments and the welfare effects of multilateral domestic tax reform in a model of international Cournot oligopoly. The welfare effects of commodity tax harmonization (appropriately defined) are precisely as in the competitive case: it is always potentially Pareto-improving, and starting from the Nash equilibrium in tax rates is Pareto-improving without any need for compensation. A mutual reduction of production subsidies benefits the efficient (low marginal cost) country and harms the inefficient; despite the pre-existing monopoly distortion, the effect on global efficiency is ambiguous.