Environmental Impacts of Tariff and Tax Reforms Under Origin and Destination Principles

• Date: 01 May 2015
• Published date: 01 May 2015
• Author: Eden S. H. Yu,Chi‐Chur Chao
• DOI: http://doi.org/10.1111/1468-0106.12108

ENVIRONMENTAL IMPACTS OF TARIFF AND

TAX REFORMS UNDER ORIGIN AND

DESTINATION PRINCIPLES

CHI-CHUR CHAO Deakin University

EDEN S. H. YU*Chu Hai College of Higher Education

Abstract. The impacts of a point-by-point tariff/tax reform on the environment under the origin-

based or destination-based tax principle are examined. The policy reform under the origin-based

principle can raise the optimal pollution tax and, hence, improve the environment when the con-

sumption demand and pollution are strongly substitutable, whereas the reform under the

destination-based principle lowers the optimal pollution tax and, hence, worsens the environment.

Nonetheless, when the consumption demand and pollution exhibit weak substitutes or even com-

plements, the tariff/tax reform results in less environmental deterioration under the destination-

based principle.

1. INTRODUCTION

Commodity taxes constitute a major source of government revenue in most

countries. Such taxes can be designed on the basis of either the destination

principle or the origin principle. The former refers to the levy of the taxes on

goods by a jurisdiction in which they are purchased, while the latter is the case

in which commodities are taxed where they are produced. The commonly

adopted taxation is based on the destination principle, but for successful imple-

mentation, it requires efficient border monitoring and control. However, recent

globalization facilitates movement of consumers across regional and national

borders, giving rise to domestic tax avoidance. Hence, the destination-based tax

principle may not be effective. Alternatively, the government may adopt taxes

based on the origin principle, as discussed in Lockwood et al. (1994) and Lucas

(2001).

Traditionally, trade taxes, such as tariffs, were a non-trivial source of govern-

ment revenue, especially for developing nations, as documented by Baunsgaard

and Keen (2010). However, the role of tariffs in generating revenue for govern-

ment has become increasingly insignificant, as a result of recent liberalization of

goods trade. To offset the loss of tariff revenue so as to ease fiscal burdens,

upward adjustments on domestic commodity taxes have been suggested by

the IMF and the World Bank and subsequently implemented in many countries.

Accordingly, recent literature on tax reforms (Hatzipanayotou et al., 1994;

Keen and Ligthart, 2002; Emran and Stiglitz, 2005; Kreickemeier and

Raimondos-Moller, 2008) has focused on the point-by-point tariff/tax adjust-

ments. Such reforms can mitigate the tariff distortion by lowering either the

*Address for Correspondence: Faculty of Commerce, Chu Hai College, Tsuen Wan, Hong Kong.

E-mail: edenyu@chuhai.edu.hk. We thank an anonymous referee and Wang Yong for valuable

comments and suggestions.

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Pacific Economic Review, 20: 2 (2015) pp. 310–322

doi: 10.1111/1468-0106.12108

© 2015 Wiley Publishing Asia Pty Ltd