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Optimal Factor Income Taxation in the Presence of Unemployment

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  • Erkki Koskela
  • Ronnie Schöb

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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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 279.

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

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

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References

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  1. Guesnerie, Roger & Laffont, Jean-Jacques, 1978. "Taxing price makers," Journal of Economic Theory, Elsevier, Elsevier, vol. 19(2), pages 423-455, December.
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  3. Holm, Pasi & Honkapohja, Seppo & Koskela, Erkki, 1994. "A monopoly-union model of wage determination with capital and taxes: An empirical application to the Finnish manufacturing," European Economic Review, Elsevier, Elsevier, vol. 38(2), pages 285-303, February.
  4. Bucovetsky, Sam & Wilson, John Douglas, 1991. "Tax competition with two tax instruments," Regional Science and Urban Economics, Elsevier, Elsevier, vol. 21(3), pages 333-350, November.
  5. Huizinga, H.P. & Nielsen, S.B., 1995. "Capital income and profits taxation with foreign ownership of firms," Discussion Paper, Tilburg University, Center for Economic Research 1995-82, Tilburg University, Center for Economic Research.
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  7. Koskela Erkki & Schöb Ronnie, 2002. "Why Governments Should Tax Mobile Capital in the Presence of Unemployment," The B.E. Journal of Economic Analysis & Policy, De Gruyter, De Gruyter, vol. 1(1), pages 1-22, January.
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  10. Clemens Fuest & Bernd Huber, 1999. "Tax Coordination and Unemployment," International Tax and Public Finance, Springer, Springer, vol. 6(1), pages 7-26, February.
  11. Eggert, Wolfgang & Haufler, Andreas, 1999. "Capital taxation and production efficiency in an open economy," Munich Reprints in Economics, University of Munich, Department of Economics 20564, University of Munich, Department of Economics.
  12. Nash, John, 1950. "The Bargaining Problem," Econometrica, Econometric Society, Econometric Society, vol. 18(2), pages 155-162, April.
  13. 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.
  14. Wolfram Richter & Kerstin Schneider, 2001. "Taxing Mobile Capital with Labor Market Imperfections," International Tax and Public Finance, Springer, Springer, vol. 8(3), pages 245-262, May.
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  17. Ken Binmore & Ariel Rubinstein & Asher Wolinsky, 1986. "The Nash Bargaining Solution in Economic Modelling," RAND Journal of Economics, The RAND Corporation, vol. 17(2), pages 176-188, Summer.
  18. Lockwood, Ben & Manning, Alan, 1993. "Wage setting and the tax system theory and evidence for the United Kingdom," Journal of Public Economics, Elsevier, Elsevier, vol. 52(1), pages 1-29, August.
  19. Koskela, Erkki & Schöb, Ronnie & Sinn, Hans-Werner, 1998. "Pollution, Factor Taxation and Unemployment," Munich Reprints in Economics, University of Munich, Department of Economics 19493, University of Munich, Department of Economics.
  20. Razin, Assaf & Sadka, Efraim, 1991. "International tax competition and gains from tax harmonization," Economics Letters, Elsevier, Elsevier, vol. 37(1), pages 69-76, September.
  21. Lawrence H. Summers & Jonathan Gruber & Rodrigo Vergara, 1992. "Taxation and the Structure of Labor Markets: The Case of Corporatism," NBER Working Papers 4063, National Bureau of Economic Research, Inc.
  22. Stefan Homburg, 1999. "Competition and Co-ordination in International Capital Income Taxation," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, Mohr Siebeck, Tübingen, vol. 56(1), pages 1-17, March.
  23. Michael Keen & Hannu Piekkola, 1996. "Simple rules for the optimal taxation of international capital income," IFS Working Papers, Institute for Fiscal Studies W96/18, Institute for Fiscal Studies.
  24. G. D. A. MacDougall, 1960. "THE BENEFITS and COSTS OF PRIVATE INVESTMENT FROM ABROAD: A THEORETICAL APPROACH," The Economic Record, The Economic Society of Australia, The Economic Society of Australia, vol. 36(73), pages 13-35, 03.
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  26. Diamond, Peter A & Mirrlees, James A, 1971. "Optimal Taxation and Public Production: I--Production Efficiency," American Economic Review, American Economic Association, American Economic Association, vol. 61(1), pages 8-27, March.
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