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Optimal Redistributive Taxation and Provision of Public Input Goods in an Economy with Outsourcing and Unemployment

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  • Thomas Aronsson
  • Erkki Koskela
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    Abstract

    This paper concerns optimal redistributive income taxation and provision of a public input good in a two-type model with a minimum wage policy implemented for the low-ability type, where firms may use some of their resources for outsourcing by locating part of the production process abroad. Our results show that the incentive to relax the self-selection constraint and the incentive to increase employment among the low-skilled reinforce each other in terms of marginal income taxation. In addition, the appearance of equilibrium unemployment also provides an incentive for the government to directly tax outsourcing. Without a direct instrument for taxing outsourcing, the government may reduce the amount of resources spent on outsourcing by increased provision of the public input good, which is desirable in the sense that reduced outsourcing contributes to less wage inequality and increased employment.

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    Bibliographic Info

    Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2481.

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    Date of creation: 2008
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    Handle: RePEc:ces:ceswps:_2481

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    Related research

    Keywords: outsourcing; optimal nonlinear taxation; public goods; unemployment;

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    References

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    1. Haskel, Jonathan & Slaughter, Matthew, 1999. "Trade, Technology and UK Wage Inequality," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2091, C.E.P.R. Discussion Papers.
    2. Mary Amiti & Shang-Jin Wei, 2004. "Fear of Service Outsourcing," IMF Working Papers 04/186, International Monetary Fund.
    3. Rebecca Riley & Garry Young, 2007. "Skill heterogeneity and equilibrium unemployment," Oxford Economic Papers, Oxford University Press, vol. 59(4), pages 702-725, October.
    4. Alexander Hijzen, 2007. "International Outsourcing, Technological Change, and Wage Inequality," Review of International Economics, Wiley Blackwell, vol. 15(1), pages 188-205, 02.
    5. Koskela, Erkki & Schöb, Ronnie, 2001. "Optimal Factor Income Taxation in the Presence of Unemployment," Discussion Papers, The Research Institute of the Finnish Economy 758, The Research Institute of the Finnish Economy.
    6. Aronsson, Thomas & Sjögren, Tomas, 2002. "Is the Optimal Labor Income Tax Progressive in a Unionized Economy?," Umeå Economic Studies 587, Umeå University, Department of Economics.
    7. Stefanova Boyka M, 2006. "The Political Economy of Outsourcing in the European Union and the East-European Enlargement," Business and Politics, De Gruyter, vol. 8(2), pages 1-45, August.
    8. Thomas Aronsson & Erkki Koskela, 2008. "Outsourcing and Optimal Nonlinear Taxation: A Note," CESifo Working Paper Series 2269, CESifo Group Munich.
    9. Mary Amiti & Shang-Jin Wei, 2004. "Fear of Service Outsourcing: Is It Justified?," NBER Working Papers 10808, National Bureau of Economic Research, Inc.
    10. Stefan Boeters & Kerstin Schneider, 1999. "Government versus Union. The Structure of Optimal Taxation in a Unionized Labor Market," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, Mohr Siebeck, Tübingen, vol. 56(2), pages 174-, June.
    11. Hartmut Egger & Peter Egger, . "International Outsourcing and the Productivity of Low-skilled Labour in the EU," WIFO Working Papers, WIFO 152, WIFO.
    12. Robin Boadway & Katherine Cuff, 1999. "A Minimum Wage can be Welfare-Improving and Employment-Enhancing," Working Papers, Queen's University, Department of Economics 980, Queen's University, Department of Economics.
    13. Stern, Nicholas, 1982. "Optimum taxation with errors in administration," Journal of Public Economics, Elsevier, Elsevier, vol. 17(2), pages 181-211, March.
    14. Geishecker, Ingo & Görg, Holger, 2007. "Winners and losers: A Micro-level Analysis of International Outsourcing and Wages," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6484, C.E.P.R. Discussion Papers.
    15. Christian Keuschnigg & Evelyn Ribi, 2008. "Outsourcing, Unemployment and Welfare Policy," CESifo Working Paper Series 2452, CESifo Group Munich.
    16. Aronsson, Thomas & Koskela, Erkki, 2008. "Outsourcing and Optimal Nonlinear Taxation: A Note," Umeå Economic Studies 737, Umeå University, Department of Economics.
    17. Marceau, Nicolas & Boadway, Robin, 1994. " Minimum Wage Legislation and Unemployment Insurance as Instruments for Redistribution," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 96(1), pages 67-81.
    18. Clemens Fuest & Bernd Huber, 1997. "Wage bargaining, labor-tax progression, and welfare," Journal of Economics, Springer, Springer, vol. 66(2), pages 127-150, June.
    19. Robert C. Feenstra & Gordon H. Hanson, 1999. "The Impact Of Outsourcing And High-Technology Capital On Wages: Estimates For The United States, 1979-1990," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 114(3), pages 907-940, August.
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    Cited by:
    1. Martinez, Diego & Sjögren, Tomas, 2013. "Can Labor Market Imperfections Cause Overprovision of Public Inputs?," Umeå Economic Studies 858, Umeå University, Department of Economics.

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