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Tax Competition under Imperfect Labor Market

Author

Listed:
  • Sangwha Shin

    (Chungnam National University)

  • Sang-Hyun Kim

    (Yonsei University)

Abstract

We develop a two-country model of tax competition in which governments attempt to attract more capital by adjusting the corporate income tax rate. We allow labor market imperfection and investigate how it relates to the intensity of tax competition. It is shown that in response to a symmetric increase in the labor market costs, capital becomes less sensitive to corporate income tax rates. When the labor market costs increase, firms’ profits drop more greatly in the foreign market than in the domestic market due to the existence of trade costs. Thus, firms become less concerned about the level of tax rates in the locational decision.

Suggested Citation

  • Sangwha Shin & Sang-Hyun Kim, 2022. "Tax Competition under Imperfect Labor Market," Korean Economic Review, Korean Economic Association, vol. 38, pages 141-166.
    • Handle: RePEc:kea:keappr:ker-20220101-38-1-05
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Labor Market Imperfection; Tax Competition; Corporate Income Tax Rate;
    All these keywords.

    JEL classification:

    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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