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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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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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Related research

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

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References

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  1. van der ploeg, F., 1987. "Coordination of optimal taxation in a two-country equilibrium model," Economics Letters, Elsevier, Elsevier, vol. 24(3), pages 279-285.
  2. Michael Keen and Sajal Lahiri, . "The Comparison Between Destination and Origin Principles Under Imperfect Competition," Economics Discussion Papers, University of Essex, Department of Economics 424, University of Essex, Department of Economics.
  3. Holmlund, Bertil & Kolm, Ann-Sofie, 1999. "Economic Integration, Imperfect Competition, and International Policy Coordination," Working Paper Series, Uppsala University, Department of Economics 1999:7, Uppsala University, Department of Economics.
  4. Lockwood, Ben, 1992. "Commodity Tax Competition Under Destination and Origin Principles," CEPR Discussion Papers, C.E.P.R. Discussion Papers 733, C.E.P.R. Discussion Papers.
  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, Elsevier, vol. 42(1), pages 155-183, January.
  6. Huizinga, H.P., 1993. "International market integration and union wage bargaining," Open Access publications from Tilburg University urn:nbn:nl:ui:12-155144, Tilburg University.
  7. Driffill, John & van der Ploeg, Frederick, 1995. " Trade Liberalization with Imperfect Competition in Goods and Labour Markets," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 97(2), pages 223-43, June.
  8. Naylor, Robin, 1998. "International trade and economic integration when labour markets are generally unionised," European Economic Review, Elsevier, Elsevier, vol. 42(7), pages 1251-1267, July.
  9. 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.
  10. Bertil Holmlund & Ann-Sofie Kolm, 2000. "Environmental Tax Reform in a Small Open Economy With Structural Unemployment," International Tax and Public Finance, Springer, Springer, vol. 7(3), pages 315-333, May.
  11. Rauch, James E., 1999. "Networks versus markets in international trade," Journal of International Economics, Elsevier, Elsevier, vol. 48(1), pages 7-35, June.
  12. Kolm, Ann-Sofie, 1998. "Differentiated payroll taxes, unemployment, and welfare," Journal of Public Economics, Elsevier, Elsevier, vol. 70(2), pages 255-271, November.
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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, J. & Fredriksson, P. & Holmlund, B. & Ours, J.C. van, 2007. "Optimal unemployment insurance with monitoring and sanctions," Open Access publications from Tilburg University urn:nbn:nl:ui:12-194308, Tilburg University.
  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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