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Corporate Taxation and the Welfare State

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Author Info
Christian Keuschnigg ()

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Abstract

The paper compares the impact of corporate taxation and social insurance on foreign direct investment (FDI) and unemployment. Four main results are derived: (i) the optimal size of the welfare state depends on the degree of risk-aversion and the unemployment rate as a measure of labor income risk. The unemployment rate partly reflects the country's exposure to globalization; (ii) corporate taxation and social insurance have equivalent effects on unemployment and outbound FDI; (iii) while an increase in the corporate tax can raise corporate tax revenue, it is rather likely to worsen the government's total fiscal stance. A corporate tax cut can thus be self-financing due to fiscal increasing returns in the presence of a large public sector; (iv) a corporate tax should be used to contribute to welfare state financing only in exceptional cases when job creation is excessive and the unemployment rate is inefficiently low. These conditions are probably unlikely to hold in Europe's generous welfare states with high structural unemployment rates.

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File URL: http://www.vwa.unisg.ch/RePEc/usg/dp2008/DP-18-Ke.pdf
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Publisher Info
Paper provided by Department of Economics, University of St. Gallen in its series University of St. Gallen Department of Economics working paper series 2008 with number 2008-18.

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Length: 31 pages
Date of creation: Aug 2008
Date of revision:
Handle: RePEc:usg:dp2008:2008-18

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Related research
Keywords: Corporate tax; foreign direct investment; unemployment; welfare state;

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Find related papers by JEL classification:
F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
H53 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Welfare Programs
J64 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Unemployment: Models, Duration, Incidence, and Job Search
J65 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Unemployment Insurance; Severance Pay; Plant Closings

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    Other versions:
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    Other versions:
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Christian Keuschnigg, 2009. "The Role of Corporate Taxation in a Large Welfare State," University of St. Gallen Department of Economics working paper series 2009 2009-23, Department of Economics, University of St. Gallen. [Downloadable!]
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