Fighting Tax Competition in the Presence of Unemployment: Complete versus Partial Tax Coordination

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Fighting Tax Competition in the Presence of Unemployment: Complete versus Partial Tax Coordination

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Sven Wehke

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Sven Wehke

Abstract

We analyze the welfare consequences of tax coordination agreements that cover taxes on mobile capital and on immobile labor. In doing so, we take into account two important institutional details. First, we incorporate decentralized wage bargaining, giving rise to involuntary unemployment. Second, we distinguish between complete tax coordination, which effectively covers both tax instruments, and the more plausible case of partial tax coordination, where one tax is marginally increased by all countries, while the other tax rate can still be freely chosen by all countries. It is shown that complete tax coordination remains welfare-enhancing in the presence of unemployment. In contrast, for partial tax coordination, the welfare effect becomes ambiguous and is different to the case of competitive labor markets.

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Article provided by Mohr Siebeck, Tübingen in its journal FinanzArchiv.

Volume (Year): 64 (2008)
Issue (Month): 1 (March)
Pages: 33-62
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Handle: RePEc:mhr:finarc:urn:sici:0015-2218(200803)64:1_33:ftcitp__33:ftcitp_2.0.tx_2-b

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Paper
- Sven Wehke, 2007. "Fighting Tax Competition in the Presence of Unemployment: Complete versus Partial Tax Coordination," FEMM Working Papers 07010, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management. [Downloadable!]

Find related papers by JEL classification:
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods
J51 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Trade Unions: Objectives, Structure, and Effects

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