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Optimal capital taxation in economies with unionized and competitive labour markets


  • Erkki Koskela
  • Ronnie Schöb


According to the existing literature, capital taxes should not be imposed in the presence of optimal profit taxation in either unionized or competitive labour markets. We show that this conclusion does not hold for economies with dual labour markets where the competitive wage rate provides the outside option for unionized workers. Even with non-distortionary profit taxation, it is optimal for such economies to tax capital if the revenue share of capital in the unionized sector is lower than in the competitive sector. This is because taxing capital income reduces employment and lowers the outside option of workers in the unionized sector, with the latter employment effect being stronger. A capital subsidy should be granted if the opposite relationship of the revenue shares of capital holds. Copyright 2005, Oxford University Press.

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  • Erkki Koskela & Ronnie Schöb, 2005. "Optimal capital taxation in economies with unionized and competitive labour markets," Oxford Economic Papers, Oxford University Press, vol. 57(4), pages 717-731, October.
  • Handle: RePEc:oup:oxecpp:v:57:y:2005:i:4:p:717-731

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    References listed on IDEAS

    1. Koskela Erkki & Schöb Ronnie, 2002. "Why Governments Should Tax Mobile Capital in the Presence of Unemployment," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 1(1), pages 1-22, January.
    2. Huizinga, Harry & Nielsen, Soren Bo, 1997. "Capital income and profit taxation with foreign ownership of firms," Journal of International Economics, Elsevier, vol. 42(1-2), pages 149-165, February.
    3. Lawrence Summers & Jonathan Gruber & Rodrigo Vergara, 1993. "Taxation and the Structure of Labor Markets: The Case of Corporatism," The Quarterly Journal of Economics, Oxford University Press, vol. 108(2), pages 385-411.
    4. Koskela, Erkki & Schob, Ronnie, 2002. " Optimal Factor Income Taxation in the Presence of Unemployment," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 4(3), pages 387-404.
    5. G. D. A. MacDougall, 1960. "THE BENEFITS and COSTS OF PRIVATE INVESTMENT FROM ABROAD: A THEORETICAL APPROACH," The Economic Record, The Economic Society of Australia, vol. 36(73), pages 13-35, March.
    6. Olivier Blanchard & Lawrence F. Katz, 1997. "What We Know and Do Not Know about the Natural Rate of Unemployment," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 51-72, Winter.
    7. Wolfram Richter & Kerstin Schneider, 2001. "Taxing Mobile Capital with Labor Market Imperfections," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 8(3), pages 245-262, May.
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    Cited by:

    1. Kangoh Lee, 2012. "Why is mobile capital taxed?," Journal of Economics, Springer, vol. 107(2), pages 157-181, October.
    2. Kjell Erik Lommerud & Bjørn Sandvik & Odd Rune Straume, 2004. "Good Jobs, Bad Jobs and Redistribution," Scandinavian Journal of Economics, Wiley Blackwell, vol. 106(4), pages 703-720, December.
    3. Wolfgang Eggert & Laszlo Goerke, "undated". "Fiscal Policy, Economic Integration and Unemployment," EPRU Working Paper Series 02-05, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
    4. canegrati, emanuele, 2007. "The single-mindedness of labor unions when transfers are not Lump-Sum," MPRA Paper 2320, University Library of Munich, Germany.
    5. canegrati, emanuele, 2006. "The Single Mindedness Theory of Labor Unions," MPRA Paper 1224, University Library of Munich, Germany.
    6. Canegrati, Emanuele, 2007. "The Single-Mindedness of Labor Unions: Theory and Empirical Evidence," MPRA Paper 1398, University Library of Munich, Germany.
    7. Silvia Rocha-Akis, 2012. "The Pain and Gain of Offshoring: The Effects of Tax Progression in a Segmented Labour Market," CESifo Working Paper Series 3739, CESifo Group Munich.

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