Canada - U.S. Free Trade and Pressures for Tax Harmonization
Roger H. Gordon
To what degree will the recent free-trade agreement create pressure on the
U.S. and Canada to modify, and perhaps harmonize, their tax systems? What will
be the implications of the more extensive policy changes now going on within
the E.C.? This paper examines the types of pressures for reform created by
recent agreements, focussing in turn on the pressures created by capital
mobility, elimination to tariff and nontariff barriers, and mobility of
individuals. As shown in the local public finance literature, unrestricted
individuals and firms pay tax in accordance with the costs they impose on the
community. More limited mobility should have more limited effects. Since
existing national tax structures differ dramatically from those that have
evolved to finance local governments, however, even limited mobility can force
substantial changes in each country's fiscal structure. In addition to
characterizing the equilibrium tax structure that should result, given
increased mobility, the paper also explores the circumstances in which there
can be mutual gains from moving away from the equilibrium tax structure.
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