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Asymmetric Capital-Tax Competition, Unemployment and Losses from Capital Market Integration

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  • Rüdiger Pethig
  • Frieder Kolleß

Abstract

In a multi-country general equilibrium economy with mobile capital and rigid-wage unemployment, countries may differ in capital endowments, production technologies and rigid wages. Governments tax capital at the source to maximize national welfare. They account for tax base responses to their tax and take as given the world-market interest rate. We specify conditions under which - in contrast to free trade with undistorted labor markets - welfare declines and unemployment increases in some countries (i) when moving from au-tarky to trade without taxation and/or (ii) when moving from trade without taxation to tax competition.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2795.

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Date of creation: 2009
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Handle: RePEc:ces:ceswps:_2795

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Keywords: capital taxation; asymmetric tax competition; rigid wages; unemployment; losses from trade;

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  1. Aronsson, Thomas & Wehke, Sven, 2006. "Public Goods, Unemployment and Policy Coordination," UmeÃ¥ Economic Studies 700, Umeå University, Department of Economics.
  2. Fuest, Clemens & Huber, Bernd, 1999. "Tax Coordination and Unemployment," Munich Reprints in Economics 20298, University of Munich, Department of Economics.
  3. Zodrow, George R. & Mieszkowski, Peter, 1986. "Pigou, Tiebout, property taxation, and the underprovision of local public goods," Journal of Urban Economics, Elsevier, vol. 19(3), pages 356-370, May.
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  5. LEITE-MONTEIRO, Manuel & Maurice MARCHAND & Pierre PESTIEAU, . "Employment subsidy with capital mobility," CORE Discussion Papers RP -1609, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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  7. DePeter James A. & Myers Gordon M., 1994. "Strategic Capital Tax Competition: A Pecuniary Externality and a Corrective Device," Journal of Urban Economics, Elsevier, vol. 36(1), pages 66-78, July.
  8. Ogawa, Hikaru & Sato, Yasuhiro & Tamai, Toshiki, 2006. "A note on unemployment and capital tax competition," Journal of Urban Economics, Elsevier, vol. 60(2), pages 350-356, September.
  9. 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).
  10. Wilson, J.D., 1990. "Tax Competition With Interregional Differences In Factor Endowments," Working Papers 4, John Deutsch Institute for the Study of Economic Policy.
  11. Clemens Fuest & Bernd Huber, . "Tax Coordination and Unemployment," EPRU Working Paper Series 97-26, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
  12. Bucovetsky, S., 1991. "Asymmetric tax competition," Journal of Urban Economics, Elsevier, vol. 30(2), pages 167-181, September.
  13. Wolfgang Eggert & Laszlo Goerke, . "Fiscal Policy, Economic Integration and Unemployment," EPRU Working Paper Series 02-05, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
  14. Lockwood, Ben & Makris, Miltiadis, 2006. "Tax incidence, majority voting and capital market integration," Journal of Public Economics, Elsevier, vol. 90(6-7), pages 1007-1025, August.
  15. Eaton, Jonathan & Panagariya, Arvind, 1979. "Gains from trade under variable returns to scale, commodity taxation, tariffs and factor market distortions," Journal of International Economics, Elsevier, vol. 9(4), pages 481-501, November.
  16. Wilson, John D., 1986. "A theory of interregional tax competition," Journal of Urban Economics, Elsevier, vol. 19(3), pages 296-315, May.
  17. Nickell, Stephen J, 1990. "Unemployment: A Survey," Economic Journal, Royal Economic Society, vol. 100(401), pages 391-439, June.
  18. Bergstrom, Villy & Panas, Epaminondas E, 1992. "How Robust Is the Capital-Skill Complementarity Hypothesis?," The Review of Economics and Statistics, MIT Press, vol. 74(3), pages 540-46, August.
  19. Peralta, Susana & van Ypersele, Tanguy, 2005. "Factor endowments and welfare levels in an asymmetric tax competition game," Journal of Urban Economics, Elsevier, vol. 57(2), pages 258-274, March.
  20. Kessler, Anke S. & Lulfesmann, Christoph & Myers, Gordon M., 2003. "Economic versus political symmetry and the welfare concern with market integration and tax competition," Journal of Public Economics, Elsevier, vol. 87(5-6), pages 847-865, May.
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