Tax Principles and Privatization: Destination versus Origin in an International Mixed Duopoly

Abstract This paper studies the destination and origin principles in an international mixed duopoly where a partially privatized public firm competes with a foreign private firm. Governments set commodity tax rates non-cooperatively under each harmonized taxation principle. We show that ownership asymmetry reshapes institutional incentives: the foreign government strictly prefers the origin principle, whereas the domestic government’s ranking depends on privatization and trade costs, leading to potential divergence in national preferences. Nevertheless, global welfare is strictly higher under the origin principle. The paper’s key contribution is to separate global regime ranking from national institutional incentives. Unlike symmetric private-firm models – where national and global objectives align – introducing public ownership breaks this equivalence and alters governments’ preferences over tax principles.