On commodity tax harmonization and public goods provision

Abstract

This paper argues that Pareto improvements based on harmonizing tax reformsexpressed in terms of the divergence between actual and optimal tax structures andover/under provision of public goods require the use of ‘pseudo-optimal’ taxes insteadof optimal ones. ‘Pseudo-optimal’ taxes are defined as those obtained using the optimaltax formulas but evaluated at any arbitrary initial tax structure. Within this context thepaper reconfirms existing results showing that tax harmonization emerges as a strongpolicy instrument in achieving a potential Pareto-improvement.