On welfare and revenue effects of indirect tax harmonization

This paper discusses whether some of the propositions concerning indirect tax harmonization that have been derived in models where tax revenue is returned to the consumers as a lump-sum transfer can also be extended to the more relevant situations in which governments levy taxes to finance the purchase of goods and services. Using a two-country model, it is argued that a family of indirect tax harmonization policies, expressed as a multilateral movement of domestic taxes towards an appropriately designed “average” tax structure, can be characterized as potentially welfare improving.