Pareto-Efficient International Taxation

This paper analyzes Pareto-efficient international tax regimes. Because every country faces its own national budget constraint, the Diamond-Mirrlees production-efficiency theorem, which underlies key tenets of policy advice in international taxation—the desirability of destination basis for commodity taxation, of the residence principle for capital income taxation, and of free trade—does not apply. The paper establishes conditions—relating to the availability of explicit or implicit devices for reallocating tax revenues across countries—under which production efficiency is nevertheless desirable, and characterizes the precise ways in which Pareto-efficient international taxation may require violation of established tenets.