Why Governments Should Tax Mobile Capital in the Presence of Unemployment
AbstractThis paper shows that a small open economy should levy positive source-based taxes on capital income to fight involuntary unemployment and increase welfare. A revenue-neutral tax reform which increases the capital tax rate and reduces the labour tax rate will induce firms to substitute labour for capital. Even though trade unions might succeed in subsequently increasing the net-of-tax wage rate, such a tax reform will lower marginal cost of production, increase output, and reduce unemployment as long as the labour tax rate exceeds the capital tax rate if elasticity of substitution is above a critical value which is itself below one. Independent of the elasticity of substitution, the government can promote wage moderation by increasing the personal tax credit instead of reducing the labour tax rate.
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Bibliographic InfoPaper provided by Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics in its series EPRU Working Paper Series with number 98-08.
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- Koskela Erkki & Schöb Ronnie, 2002. "Why Governments Should Tax Mobile Capital in the Presence of Unemployment," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 1(1), pages 1-22, January.
- H2 - Public Economics - - Taxation, Subsidies, and Revenue
- J5 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining
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