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International Spillover Effects of Sectoral Tax Differentiation in Unionized Economies

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Author Info
Holmlund, Bertil
Kolm, Ann-Sofie

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Abstract

The European Union has recently proposed sectoral tax differentiation as a policy to fight unemployment. The member countries are allowed to reduce the VAT rates on goods and services that are particularly labor intensive and price elastic. The paper provides a theoretical analysis of the effects of such tax reforms, with particular emphasis on the international repercussions of the policies. To that end we develop a two-country and two-sector model with monopolistic competition in the goods market and wage bargaining in the labor market. Policy externalities operate through the endogenously determined terms of trade. We examine how national and supranational commodity tax policies affect sectoral and total employment and characterize optimal commodity taxes with and without international policy cooperation. Some rough estimates of the welfare gains from policy coordination are also presented, using a calibrated version of the model.

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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. 295.

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Date of creation: 2000
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Handle: RePEc:ces:ceswps:_295

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Related research
Keywords: Economic integration; imperfect competition; wage determination; policy cooperation;

Other versions of this item:

Find related papers by JEL classification:
D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
F15 - International Economics - - Trade - - - Economic Integration
J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
J64 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Unemployment: Models, Duration, Incidence, and Job Search

Cited by:
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  1. Engstrom, Per & Holmlund, Bertil & Kolm, Ann-Sofie, 2001. "Optimal Taxation in Search Equilibrium with Home Production," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  2. Boone, Jan & Fredriksson, Peter & Holmlund, Bertil & van Ours, Jan, 2001. "Optimal Unemployment Insurance with Monitoring and Sanctions," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  3. Peter Hennessy & Thierry Warin, 2004. "One Welfare State for Europe: A Costly Utopia?," Global Economy Journal, Berkeley Electronic Press, vol. 4(2). [Downloadable!]
  4. Thierry Warin & Peter Hennessy, 2003. "One Welfare State for Europe: A Costly Utopia?," Middlebury College Working Paper Series 0325, Middlebury College, Department of Economics. [Downloadable!]
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