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International Spillover Effects of Sectoral Tax Differentiation in Unionized Economies

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  • Bertil Holmlund
  • Ann-Sofie Kolm

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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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2000/wp-cesifo-2000-05/cesifo_wp295.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 295.

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

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

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References

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  1. Lockwood, Ben, 1993. "Commodity tax competition under destination and origin principles," Journal of Public Economics, Elsevier, vol. 52(2), pages 141-162, September.
  2. James E. Rauch, 1996. "Networks versus Markets in International Trade," NBER Working Papers 5617, National Bureau of Economic Research, Inc.
  3. Huizinga, Harry, 1993. " International Market Integration and Union Wage Bargaining," Scandinavian Journal of Economics, Wiley Blackwell, vol. 95(2), pages 249-55.
  4. Driffill, John & van der Ploeg, Frederick, 1995. " Trade Liberalization with Imperfect Competition in Goods and Labour Markets," Scandinavian Journal of Economics, Wiley Blackwell, vol. 97(2), pages 223-43, June.
  5. Pissarides, Christopher A., 1998. "The impact of employment tax cuts on unemployment and wages; The role of unemployment benefits and tax structure," European Economic Review, Elsevier, vol. 42(1), pages 155-183, January.
  6. Kolm, Ann-Sofie, 1998. "Differentiated payroll taxes, unemployment, and welfare," Journal of Public Economics, Elsevier, vol. 70(2), pages 255-271, November.
  7. Naylor, Robin, 1998. "International trade and economic integration when labour markets are generally unionised," European Economic Review, Elsevier, vol. 42(7), pages 1251-1267, July.
  8. Holmlund, Bertil & Kolm, Ann-Sofie, 1998. "Environmental Tax Reform in a Small Open Economy with Structural Unemployment," Working Paper Series, Uppsala University, Department of Economics 1997:2, Uppsala University, Department of Economics.
  9. Michael Keen & Sajal Lahiri, 1994. "The comparison between destination and origin principles under imperfect competition," IFS Working Papers, Institute for Fiscal Studies W94/08, Institute for Fiscal Studies.
  10. Holmlund, B. & Kolm, A.-S., 1999. "Economic Integration, Imperfect Competition, and International Policy Coordination," Papers, Uppsala - Working Paper Series 1999:7, Uppsala - Working Paper Series.
  11. Driffill, John & van der Ploeg, Frederick, 1993. "Monopoly Unions and the Liberalisation of International Trade," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 103(417), pages 379-85, March.
  12. van der ploeg, F., 1987. "Coordination of optimal taxation in a two-country equilibrium model," Economics Letters, Elsevier, vol. 24(3), pages 279-285.
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Cited by:
  1. Hennessy Peter & Warin Thierry, 2004. "One Welfare State for Europe: A Costly Utopia?," Global Economy Journal, De Gruyter, De Gruyter, vol. 4(2), pages 1-17, December.
  2. Boone, Jan & Fredriksson, Peter & Holmlund, Bertil & van Ours, Jan, 2001. "Optimal Unemployment Insurance with Monitoring and Sanctions," Working Paper Series, Uppsala University, Department of Economics 2001:20, Uppsala University, Department of Economics.
  3. Bertil Holmlund & Ann-Sofie Kolm, 2001. "Optimal Taxation in Search Equilibrium with Home Production," CESifo Working Paper Series 613, CESifo Group Munich.

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