Pareto Efficiency in International Taxation

This paper addresses a key but neglected task in the theory of international taxation, lent increased urgency by growing awareness of the potential gains from tax coordination: the characterization of Pareto-efficient international tax regimes. It shows that the Diamond-Mirrlees theorem on the desirability of production efficiency, which underlies the 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 ? is rendered inherently inapplicable to problems of international tax design by the distinctness of national budget constraints that is of the essence in thinking about international taxation. Conditions are established ? relating to the availability of explicit or implicit devices for reallocating tax revenues across countries ? under which production efficiency is nevertheless desirable, and a general characterization developed of the precise ways in which Pareto-efficient international taxation may require violation of established tenets.