Why Governments Should Tax Mobile Capital in the Presence of Unemployment
This paper shows that a small open economy that suffers from involuntary unemployment should levy a positive source-based tax on capital income. A revenue-neutral tax reform that increases the capital tax rate and reduces the labour tax rate will induce firms to substitute labour for capital. Such a tax reform will lower the marginal cost of production, increase output, reduce unemployment, and increase domestic welfare as long as the labour tax rate exceeds the capital tax rate. The result holds even though trade unions might succeed in subsequently increasing the net-of-tax wage rate, if the elasticity of substitution between capital and labour is above a critical value (which is itself below one). Finally, and importantly, independent of the size of the elasticity of substitution, the government can promote wage moderation and reduce unemployment by increasing the personal tax credit of employed workers instead of reducing the labour tax rate.
If 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.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 1 (2002)
Issue (Month): 1 (January)
|Contact details of provider:|| Web page: http://www.degruyter.com|
|Order Information:||Web: http://www.degruyter.com/view/j/bejeap|
When requesting a correction, please mention this item's handle: RePEc:bpj:bejeap:v:contributions.1:y:2002:i:1:n:1. See general 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: (Peter Golla)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.