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Optimal Capital Taxation in Economies with Unionised and Competitive Labour Markets

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  • Erkki Koskela
  • Ronnie Schöb

Abstract

According to the existing literature, capital taxes should not be imposed in the presence of optimal profit taxation in either unionised or competitive labour markets. We show that this conclusion does not hold for an economy with both competitive and unionised sectors, where the competitive wage rate provides the outside option for unionised workers. Even with non-distortionary profit taxation it is optimal for such an economy to tax capital if the revenue share of capital in the unionised sector is lower than the revenue share of capital in the competitive sector. This is because taxing capital income reduces employment and lowers the outside option of workers in the unionised sector with the latter effect being stronger. A capital subsidy should be granted if the opposite relationship in terms of revenue shares holds.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2002/wp-cesifo-2002-12/cesifo_wp819.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 819.

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Date of creation: 2002
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Handle: RePEc:ces:ceswps:_819

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Keywords: optimal capital taxation; unionised and competitive labour markets; outside option;

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References

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  1. Erkki Koskela & Ronnie Schöb, 2000. "Optimal Factor Income Taxation in the Presence of Unemployment," CESifo Working Paper Series 279, CESifo Group Munich.
  2. 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.
  3. G. D. A. MacDougall, 1960. "THE BENEFITS and COSTS OF PRIVATE INVESTMENT FROM ABROAD: A THEORETICAL APPROACH," The Economic Record, The Economic Society of Australia, vol. 36(73), pages 13-35, 03.
  4. Lawrence H. Summers & Jonathan Gruber & Rodrigo Vergara, 1992. "Taxation and the Structure of Labor Markets: The Case of Corporatism," NBER Working Papers 4063, National Bureau of Economic Research, Inc.
  5. Olivier Blanchard & Lawrence F. Katz, 1996. "What We Know and Do Not Know About the Natural Rate of Unemployment," NBER Working Papers 5822, National Bureau of Economic Research, Inc.
  6. Wolfram F. Richter & Kerstin Schneider, 2001. "Taxing Mobile Capital with Labor Market Imperfections," CESifo Working Paper Series 477, CESifo Group Munich.
  7. Erkki Koskela & Ronnie Schöb, . "Why Governments Should Tax Mobile Capital in the Presence of Unemployment," EPRU Working Paper Series, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics 98-08, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
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Citations

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Cited by:
  1. canegrati, emanuele, 2007. "The single-mindedness of labor unions when transfers are not Lump-Sum," MPRA Paper 2320, University Library of Munich, Germany.
  2. Wolfgang Eggert & Laszlo Goerke, 2003. "Fiscal Policy, Economic Integration and Unemployment," CESifo Working Paper Series 1102, CESifo Group Munich.
  3. Kangoh Lee, 2012. "Why is mobile capital taxed?," Journal of Economics, Springer, vol. 107(2), pages 157-181, October.
  4. canegrati, emanuele, 2006. "The Single Mindedness Theory of Labor Unions," MPRA Paper 1224, University Library of Munich, Germany.
  5. Kjell Erik Lommerud & Bjørn Sandvik & Odd Rune Staume, 2003. "Good Jobs, Bad Jobs and Redistribution," CESifo Working Paper Series 1022, CESifo Group Munich.
  6. Canegrati, Emanuele, 2007. "The Single-Mindedness of Labor Unions: Theory and Empirical Evidence," MPRA Paper 1398, University Library of Munich, Germany.
  7. Silvia Rocha-Akis, 2012. "The Pain and Gain of Offshoring: The Effects of Tax Progression in a Segmented Labour Market," CESifo Working Paper Series 3739, CESifo Group Munich.

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