Abstract This paper examines the optimal structure of commodity taxation in an open economy characterized by firm mobility and labor market segmentation. We develop a two-country general equilibrium model with monopolistic competition, endogenous firm relocation, and a dual labor market in which skilled workers earn flexible wages while unskilled workers face wage rigidity. Within this framework, we compare the welfare implications of two competing tax principles: the destination principle (taxation at the point of consumption) and the origin principle (taxation at the point of production). Our central finding is the existence of a threshold condition: when the share of production income accruing to skilled labor exceeds 50%, the origin principle Pareto dominates in a non-cooperative setting; otherwise, the destination principle yields superior outcomes. This result offers a tractable, empirically grounded decision rule based on observable labor market parameters and sheds new light on the design of international tax coordination mechanisms.
Nicolas Djob Li Ngue Bikob (Tue,) studied this question.