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Optimal Income Taxation, Outsourcing and Policy Cooperation in a Dynamic Economy

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  • Thomas Aronsson
  • Erkki Koskela
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    Abstract

    This paper concerns optimal income taxation in a two-country OLG economy, where each country is characterized by asymmetric information between the government and the private sector, and where one of the countries outsources part of its production to the other. In the country whose firms outsource production abroad, the government will respond to outsourcing by implementing a more progressive labor income tax structure and higher marginal capital income tax rates than it would have done in the absence of outsourcing. The tax policy response by the government in the country that receives foreign production capacity is, in general, ambiguous and depends on a tradeoff between wage-equality and factor income from abroad. By using the noncooperative Nash equilibrium as a reference case, we also consider tax policy cooperation leading to higher welfare.

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    File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2009/wp-cesifo-2009-09/cesifo1_wp2776.pdf
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    Bibliographic Info

    Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2776.

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    Date of creation: 2009
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    Handle: RePEc:ces:ceswps:_2776

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    Related research

    Keywords: outsourcing; redistribution; optimal nonlinear taxation; intertemporal model;

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    1. Acemoglu, Daron & Zilibotti, Fabrizio, 1998. "Productivity Differences," Seminar Papers 660, Stockholm University, Institute for International Economic Studies.
    2. Marta Aloi & Manuel Leite-Monteiro & Teresa Lloyd-Braga, . "Unionized Labor Markets and Globalized Capital Markets," Discussion Papers 08/10, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
    3. Mary Amiti & Shang-Jin Wei, 2004. "Fear of Service Outsourcing: Is It Justified?," NBER Working Papers 10808, National Bureau of Economic Research, Inc.
    4. Aronsson, Thomas & Koskela, Erkki, 2009. "Outsourcing and optimal nonlinear taxation: A note," Economics Letters, Elsevier, vol. 102(2), pages 135-137, February.
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