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International spillover effects of sectoral tax differentiation in unionized economies

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  • Bertil Holmlund

Abstract

Sectoral tax differentiation has in recent years appeared on the agenda in European policy discussions concerning unemployment. The member countries of the European Union are allowed to reduce the value added tax rates on goods and services that are particularly labour intensive and price elastic. This paper provides a theoretical analysis of the international repercussions of such policies. We develop a two-country and two-sector model with monopolistic competition in the goods market and wage bargaining in the labour market. Policy externalities operate through the endogenously determined terms of trade. We examine how national and supranational commodity tax policies affect sectoral and total employment and characterize optimal commodity taxes with and without international policy cooperation. Some rough estimates of the welfare gains from policy coordination are also presented, using a calibrated version of the model. Copyright 2002, Oxford University Press.

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Bibliographic Info

Article provided by Oxford University Press in its journal Oxford Economic Papers.

Volume (Year): 54 (2002)
Issue (Month): 2 (April)
Pages: 207-229

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Handle: RePEc:oup:oxecpp:v:54:y:2002:i:2:p:207-229

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References

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  1. Michael Keen and Sajal Lahiri, . "The Comparison Between Destination and Origin Principles Under Imperfect Competition," Economics Discussion Papers, University of Essex, Department of Economics 424, University of Essex, Department of Economics.
  2. Huizinga, Harry, 1993. " International Market Integration and Union Wage Bargaining," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 95(2), pages 249-55.
  3. James E. Rauch, 1996. "Networks versus Markets in International Trade," NBER Working Papers 5617, National Bureau of Economic Research, Inc.
  4. Christopher A. Pissarides, 1997. "The Impact of Employment Tax Cuts on Unemployment and Wages: The Role of Unemployment Benefits and Tax Structure," CEP Discussion Papers, Centre for Economic Performance, LSE dp0361, Centre for Economic Performance, LSE.
  5. Holmlund, B. & Kolm, A.-S., 1999. "Economic Integration, Imperfect Competition, and International Policy Coordination," Papers, Uppsala - Working Paper Series 1999:7, Uppsala - Working Paper Series.
  6. Lockwood, Ben, 1993. "Commodity tax competition under destination and origin principles," Journal of Public Economics, Elsevier, Elsevier, vol. 52(2), pages 141-162, September.
  7. Naylor, Robin, 1998. "International trade and economic integration when labour markets are generally unionised," European Economic Review, Elsevier, Elsevier, vol. 42(7), pages 1251-1267, July.
  8. Driffill, John & van der Ploeg, Frederick, 1995. " Trade Liberalization with Imperfect Competition in Goods and Labour Markets," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 97(2), pages 223-43, June.
  9. Kolm, Ann-Sofie, 1998. "Differentiated payroll taxes, unemployment, and welfare," Journal of Public Economics, Elsevier, Elsevier, vol. 70(2), pages 255-271, November.
  10. Holmlund, Bertil & Kolm, Ann-Sofie, 1998. "Environmental Tax Reform in a Small Open Economy with Structural Unemployment," Working Paper Series, Uppsala University, Department of Economics 1997:2, Uppsala University, Department of Economics.
  11. Driffill, John & van der Ploeg, Frederick, 1993. "Monopoly Unions and the Liberalisation of International Trade," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 103(417), pages 379-85, March.
  12. van der ploeg, F., 1987. "Coordination of optimal taxation in a two-country equilibrium model," Economics Letters, Elsevier, Elsevier, vol. 24(3), pages 279-285.
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Cited by:
  1. Boone, Jan & Fredriksson, Peter & Holmlund, Bertil & van Ours, Jan, 2002. "Optimal unemployment insurance with monitoring and sanctions," Working Paper Series, IFAU - Institute for Evaluation of Labour Market and Education Policy 2002:21, IFAU - Institute for Evaluation of Labour Market and Education Policy.
  2. Engström, Per & Holmlund, Bertil & Kolm, Ann-Sofie, 2001. "Optimal Taxation in Search Equilibrium with Home Production," Working Paper Series, Uppsala University, Department of Economics 2001:19, Uppsala University, Department of Economics.
  3. Thierry Warin & Peter Hennessy, 2003. "One Welfare State for Europe: A Costly Utopia?," Middlebury College Working Paper Series, Middlebury College, Department of Economics 0325, Middlebury College, Department of Economics.

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