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International spillover effects of sectoral tax differentiation in unionized economies

  • Bertil Holmlund

Sectoral tax differentiation has in recent years appeared on the agenda in European policy discussions concerning unemployment. The member countries of the European Union are allowed to reduce the value added tax rates on goods and services that are particularly labour intensive and price elastic. This paper provides a theoretical analysis of the international repercussions of such policies. We develop a two-country and two-sector model with monopolistic competition in the goods market and wage bargaining in the labour market. Policy externalities operate through the endogenously determined terms of trade. We examine how national and supranational commodity tax policies affect sectoral and total employment and characterize optimal commodity taxes with and without international policy cooperation. Some rough estimates of the welfare gains from policy coordination are also presented, using a calibrated version of the model. Copyright 2002, Oxford University Press.

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Article provided by Oxford University Press in its journal Oxford Economic Papers.

Volume (Year): 54 (2002)
Issue (Month): 2 (April)
Pages: 207-229

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Handle: RePEc:oup:oxecpp:v:54:y:2002:i:2:p:207-229
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  1. Holmlund, B. & Kolm, A.-S., 1999. "Economic Integration, Imperfect Competition, and International Policy Coordination," Papers 1999:7, Uppsala - Working Paper Series.
  2. Rauch, James E., 1999. "Networks versus markets in international trade," Journal of International Economics, Elsevier, vol. 48(1), pages 7-35, June.
  3. Keen, Michael & Lahiri, Sajal, 1998. "The comparison between destination and origin principles under imperfect competition," Journal of International Economics, Elsevier, vol. 45(2), pages 323-350, August.
  4. Huizinga, H.P., 1993. "International market integration and union wage bargaining," Other publications TiSEM 567712dd-8f03-40d8-8428-c, Tilburg University, School of Economics and Management.
  5. Driffill, John & van der Ploeg, Frederick, 1993. "Monopoly Unions and the Liberalisation of International Trade," Economic Journal, Royal Economic Society, vol. 103(417), pages 379-85, March.
  6. Christopher Pissarides, 1997. "The impact of employment tax cuts on unemployment and wages : the role of unemployment benefits and tax structure," LSE Research Online Documents on Economics 2332, London School of Economics and Political Science, LSE Library.
  7. Lockwood, Ben, 1992. "Commodity Tax Competition Under Destination and Origin Principles," CEPR Discussion Papers 733, C.E.P.R. Discussion Papers.
  8. Naylor, Robin, 1998. "International trade and economic integration when labour markets are generally unionised," European Economic Review, Elsevier, vol. 42(7), pages 1251-1267, July.
  9. van der ploeg, F., 1987. "Coordination of optimal taxation in a two-country equilibrium model," Economics Letters, Elsevier, vol. 24(3), pages 279-285.
  10. Holmlund, Bertil & Kolm, Ann-Sofie, 1998. "Environmental Tax Reform in a Small Open Economy with Structural Unemployment," Working Paper Series 1997:2, Uppsala University, Department of Economics.
  11. Driffill, John & van der Ploeg, Frederick, 1995. " Trade Liberalization with Imperfect Competition in Goods and Labour Markets," Scandinavian Journal of Economics, Wiley Blackwell, vol. 97(2), pages 223-43, June.
  12. Kolm, Ann-Sofie, 1998. "Differentiated payroll taxes, unemployment, and welfare," Journal of Public Economics, Elsevier, vol. 70(2), pages 255-271, November.
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