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Incidence of an outsourcing tax on intermediate inputs

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  • Subhayu Bandyopadhyay

Abstract

The paper uses a Hecksher-Ohlin-Samuelson type general equilibrium framework to consider the incidence of an outsourcing tax on an economy in which the production of a specific intermediate input has been fragmented and outsourced. When the input is ?non-traded?, the outsourcing tax can reduce domestic wages even if the intermediate input producing sector is the most capital-intensive sector of the economy. This implies that contrary to received wisdom, a tax on a capital-intensive sector may actually hurt labor. On the other hand, if the intermediate input is traded, the outsourcing tax must close down the final good producing sector that uses it specifically in its production. In turn, this may force the government to look for additional policy instruments to help sustain this domestic industry.

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Bibliographic Info

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2009-039.

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Date of creation: 2009
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Handle: RePEc:fip:fedlwp:2009-039

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Keywords: Contracting out ; Taxation;

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  1. Head, Charles Keith & Mayer, Thierry & Ries, John, 2007. "How Remote is the Offshoring Threat?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6542, C.E.P.R. Discussion Papers.
  2. James R. Markusen & Anthony J. Venables, 2005. "A Multi-Country Approach to Factor-Proportions Trade and Trade Costs," NBER Working Papers 11051, National Bureau of Economic Research, Inc.
  3. Leamer, Edward E, 1996. "Wage Inequality from International Competition and Technological Change: Theory and Country Experience," American Economic Review, American Economic Association, vol. 86(2), pages 309-14, May.
  4. Gene M. Grossman & Esteban Rossi-Hansberg, 2008. "Trading Tasks: A Simple Theory of Offshoring," American Economic Review, American Economic Association, vol. 98(5), pages 1978-97, December.
  5. Arndt, Sven W., 1997. "Globalization and the open economy," The North American Journal of Economics and Finance, Elsevier, vol. 8(1), pages 71-79.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Why it is foolish to tax outsourced goods
    by Economic Logician in Economic Logic on 2009-10-15 14:28:00

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