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Taxing Mobile Capital with Labor Market Imperfections

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  • Wolfram F. Richter
  • Kerstin Schneider

Abstract

Taxing internationally mobile factors of production has been dismissed as an inefficient means of raising tax revenue. This paper addresses the question of whether it is efficient to tax capital at source when labor markets and the taxation of lumpsum income suffer from imperfections. Four reasons for taxing capital are identified: (i) institutional constraints rendering any taxation of profit income infeasible; (ii) market power in the demand for labor; (iii) market power in the supply of labor if it increases with the employment of capital; (iv) unemployment benefits that are not tied to net real wages. It is argued that the case for taxing capital is not particularly strong. By reinterpreting capital as energy the results are applicable to the discussion about ecological tax reforms.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 477.

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Date of creation: 2001
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Handle: RePEc:ces:ceswps:_477

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Keywords: Optimal taxation; factor mobility; labor market imperfections; ecological tax reform;

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References

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  1. Ruud de Mooij & A. Bovenberg, 1998. "Environmental Taxes, International Capital Mobility and Inefficient Tax Systems: Tax Burden vs. Tax Shifting," International Tax and Public Finance, Springer, Springer, vol. 5(1), pages 7-39, February.
  2. Koskela, Erkki & Schob, Ronnie, 1999. "Alleviating unemployment:: The case for green tax reforms," European Economic Review, Elsevier, Elsevier, vol. 43(9), pages 1723-1746, October.
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  8. Mintz, Jack & Tulkens, Henry, 1996. "Optimality properties of alternative systems of taxation of foreign capital income," Journal of Public Economics, Elsevier, Elsevier, vol. 60(3), pages 373-399, June.
  9. Harry Huizinga & Soeren Bo Nielsen, . "Capital Income and Profits Taxation with Foreign Ownerwhip of Firms," EPRU Working Paper Series, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics 95-09, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
  10. Peter A. Diamond & J. A. Mirrlees, 1968. "Optimal Taxation and Public Production," Working papers 22, Massachusetts Institute of Technology (MIT), Department of Economics.
  11. Richter, Wolfram F. & Schneider, Kerstin, 2003. "Energy taxation: Reasons for discriminating in favor of the production sector," European Economic Review, Elsevier, Elsevier, vol. 47(3), pages 461-476, June.
  12. Bovenberg, A Lans & van der Ploeg, Frederick, 1998. " Tax Reform, Structural Unemployment and the Environment," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 100(3), pages 593-610, September.
  13. Lans Bovenberg, A. & de Mooij, Ruud A., 1994. "Environmental taxes and labor-market distortions," European Journal of Political Economy, Elsevier, vol. 10(4), pages 655-683, December.
  14. 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.
  15. Mirrlees, James A, 1972. "On Producer Taxation," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 39(1), pages 105-11, January.
  16. Bovenberg, A.L. & Mooij, R.A. de, 1994. "Environmental levies and distortionary taxation," Open Access publications from Tilburg University urn:nbn:nl:ui:12-152985, Tilburg University.
  17. Stefan Boeters & Kerstin Schneider, 1999. "Government versus Union. The Structure of Optimal Taxation in a Unionized Labor Market," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, Mohr Siebeck, Tübingen, vol. 56(2), pages 174-, June.
  18. Oswald, Andrew J, 1985. " The Economic Theory of Trade Unions: An Introductory Survey," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 87(2), pages 160-93.
  19. 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.
  20. McDonald, Ian M & Solow, Robert M, 1981. "Wage Bargaining and Employment," American Economic Review, American Economic Association, American Economic Association, vol. 71(5), pages 896-908, December.
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