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Optimal Factor Income Taxation in the Presence of Unemployment

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Author Info
Koskela, Erkki
Schoeb, Ronnie

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Abstract

According to conventional wisdom internationally mobile capital should not be taxed or should be taxed at a lower rate than labour. An important underlying assumption behind this view is that there are no market imperfections, in particular that labour markets clear competitively. At least for Europe, which has been suffering from high unemployment f or a long time, this assumption does not seem appropriate. This paper studies the optimal factor taxation in the presence of unemployment which results from the union-firm wage bargaining both with optimal and restricted profit taxation when capital is internationally mobile and labour immobile. In setting tax rates the government is assumed to behave as a Stackelberg leader towards the private sector playing a Nash game. The main conclusion is that in the presence of unemployment, the conventional wisdom turns on its head; capital should generally be taxed at a higher rate than labour.

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Publisher Info
Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number CESifo Working Paper No. 279.

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Date of creation: 2000
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Handle: RePEc:ces:ceswps:_279

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Related research
Keywords: Optimal factor taxes; union wage bargaining; Stackelberg and Nash games;

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Find related papers by JEL classification:
C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
J51 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Trade Unions: Objectives, Structure, and Effects

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    Other versions:
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  34. Matti Virén & Erkki Koskela, 2000. "Is there a Laffer curve between aggregate output and public sector employment?," Empirical Economics, Springer, vol. 25(4), pages 605-621. [Downloadable!] (restricted)
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    Other versions:
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