The Economics of Subsidies in Ontario’s Automotive Industry
AbstractWe compare the choice between granting subsidies to the automotive industry and using the funds instead to implement a permanent reduction in the sales tax on capital goods, one of Ontario’s most distortionary taxes. Our results depend critically upon how workers respond to the withdrawal of subsidies. Either workers agree to reduce their wages to offset the lost subsidies or they refuse to adjust. Our cost-benefit analysis shows the best outcome for the economy is to eliminate the subsidies, have workers adjust, and reduce the deadweight loss of taxation. The second-best outcome is to subsidize, maintain high wage levels in the industry, but forgo the benefits of tax reform. The worst outcome would be to withdraw subsidies, have workers refuse to adjust, and then experience lost employment and production. In contrast, the best outcome for the affected workers is to maintain high wages through subsidies. Therefore workers have an incentive to act strategically, by refusing to adjust their wages. For this reason, the government’s openness to subsidies likely contributes to an environment in which subsidies become inevitable.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by University of Ottawa, Department of Economics in its series Working Papers with number 0812E.
Length: 37 pages
Date of creation: 2008
Date of revision:
Contact details of provider:
Postal: PO Box 450, Station A, Ottawa, Ontario, K1N 6N5
Phone: (613) 562-5753
Fax: (613) 562-5999
Web page: http://www.socialsciences.uottawa.ca/eco/eng/index.asp
More information through EDIRC
subsidies; Ontario; automotive sector;
Find related papers by JEL classification:
- H2 - Public Economics - - Taxation, Subsidies, and Revenue
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-12-07 (All new papers)
- NEP-LAB-2008-12-07 (Labour Economics)
- NEP-PBE-2008-12-07 (Public Economics)
You can help add them by filling out this form.
reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Diane Ritchot).
If references are entirely missing, you can add them using this form.