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.