Optimal Redistributive Taxation and Provision of Public Input Goods in an Economy with Outsourcing and Unemployment
Abstract
This paper concerns optimal redistributive income taxation and provision of a public input good in a two-type model with a minimum wage policy implemented for the low-ability type, where firms may outsource part of the production process abroad, and where outsourcing is substitutable for domestic low-ability labor. Our results show that the incentives for the government to relax the self-selection constraint and to increase the employment among the low-skilled reinforce each other in terms of marginal income taxation; both of them contribute to increase the marginal income tax rate implemented for the low-ability type and decrease the marginal income tax rate implemented for the high-ability type. The appearance of equilibrium unemployment also constitutes an incentive to implement a tax on outsourcing. Without a direct instrument for taxing outsourcing, the government may reduce the amount of resources spent on outsourcing by increased provision of the public input good, which leads to less wage inequality and increased employment.Download Info
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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 4196.Length: 30 pages
Date of creation: May 2009
Date of revision:
Handle: RePEc:iza:izadps:dp4196
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Related research
Keywords: outsourcing; optimal nonlinear taxation; public goods; unemployment;Find related papers by JEL classification:
- H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
- H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
- J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
- J62 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Job, Occupational and Intergenerational Mobility; Promotion
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-06-03 (All new papers)
- NEP-LAB-2009-06-03 (Labour Economics)
- NEP-PBE-2009-06-03 (Public Economics)
- NEP-PUB-2009-06-03 (Public Finance)
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Citations
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.Cited by:
- Aronsson, Thomas & Koskela, Erkki, 2009. "Outsourcing, Public Input Provision and Policy Cooperation," IZA Discussion Papers 4662, Institute for the Study of Labor (IZA).
- Thomas Aronsson & Erkki Koskela, 2009. "Outsourcing, Public Input Provision and Policy Cooperation," CESifo Working Paper Series 2886, CESifo Group Munich.
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