Incidence of an outsourcing tax on intermediate inputs

The paper uses a Hecksher-Ohlin-Samuelson type general equilibrium framework to consider the incidence of an outsourcing tax on an economy in which the production of a specific intermediate input has been fragmented and outsourced. If the outsourced sector provides a non-traded input, the outsourcing tax can have adverse impact on labor even if it is the most capital-intensive sector of the economy. Thus contrary to expectations, a tax on a capital-intensive sector actually hurts labor. In the case where the intermediate input is traded, the outsourcing tax closes down either the intermediate input producing sector, or the final good producing sector which uses the intermediate input.