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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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File URL: http://hdl.handle.net/10.1093/oep/gpi039
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Article provided by Oxford University Press in its journal Oxford Economic Papers.

Volume (Year): 57 (2005)
Issue (Month): 4 (October)
Pages: 717-731

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Handle: RePEc:oup:oxecpp:v:57:y:2005:i:4:p:717-731
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  1. Lawrence H. Summers & Jonathan Gruber & Rodrigo Vergara, 1992. "Taxation and the Structure of Labor Markets: The Case of Corporatism," NBER Working Papers 4063, National Bureau of Economic Research, Inc.
  2. 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, 03.
  3. Huizinga, H.P. & Nielsen, S.B., 1995. "Capital income and profits taxation with foreign ownership of firms," Discussion Paper 1995-82, Tilburg University, Center for Economic Research.
  4. 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.
  5. Erkki Koskela & Ronnie Schöb, . "Why Governments Should Tax Mobile Capital in the Presence of Unemployment," EPRU Working Paper Series 98-08, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
  6. Koskela, Erkki & Schöb, Ronnie, 2001. "Optimal Factor Income Taxation in the Presence of Unemployment," Discussion Papers 758, The Research Institute of the Finnish Economy.
  7. repec:ner:tilbur:urn:nbn:nl:ui:12-73857 is not listed on IDEAS
  8. Wolfram F. Richter & Kerstin Schneider, 2001. "Taxing Mobile Capital with Labor Market Imperfections," CESifo Working Paper Series 477, CESifo Group Munich.
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