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Fighting Tax Competition in the Presence of Unemployment: Complete versus Partial Tax Coordination

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  • Sven Wehke

    ()
    (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)

Abstract

In this paper, we analyze the welfare consequences of tax coordination agreements which cover taxes on mobile capital and immobile labor, respectively. In doing so, we take into account two important institutional details. First, we incorporate decentralized wage bargaining, giving rise to involuntary unemployment. Second, we distinguish between complete tax coordination, which effectively covers both tax instruments, and the more plausible case of partial tax coordination, where one tax is marginally increased by all countries, while the other tax rate can still be freely chosen by all countries. It is shown that complete tax coordination remains to be welfare enhancing in the presence of unemployment. In contrast, for partial tax coordination, the welfare effects become ambiguous and are different to the case of competitive labor markets.

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File URL: http://www.ww.uni-magdeburg.de/fwwdeka/femm/a2007_Dateien/2007_10.pdf
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Bibliographic Info

Paper provided by Otto-von-Guericke University Magdeburg, Faculty of Economics and Management in its series FEMM Working Papers with number 07010.

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Length: 31 pages
Date of creation: Mar 2007
Date of revision:
Handle: RePEc:mag:wpaper:07010

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Keywords: factor taxation; (partial) tax coordination; wage bargaining; unemployment;

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