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Tax-Competition with Involuntary Unemployment

  • Thomas Eichner
  • Thorsten Upmann
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    In the present paper we extend the classical tax-competition framework of Zodrow and Mieszkowski (1986) by modelling involuntary unemployment and by allowing for labour taxation as a second source of public funds. For a large class of production functions (including CES), it turns out that tax competition is characterized by underprovision of public goods, and by positive taxes on both labour and capital. We thus conclude that the results of Zodrow and Mieszkowski survive some important and substantial modifications of the framework, and are thus more general than recently suggested elsewhere.

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    Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3048.

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    Date of creation: 2010
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    Handle: RePEc:ces:ceswps:_3048
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    1. Zodrow, George R. & Mieszkowski, Peter, 1986. "Pigou, Tiebout, property taxation, and the underprovision of local public goods," Journal of Urban Economics, Elsevier, vol. 19(3), pages 356-370, May.
    2. Creedy, John & McDonald, Ian M, 1991. "Models of Trade Union Behaviour: A Synthesis," The Economic Record, The Economic Society of Australia, vol. 67(199), pages 346-59, December.
    3. Bucovetsky, Sam & Wilson, John Douglas, 1991. "Tax competition with two tax instruments," Regional Science and Urban Economics, Elsevier, vol. 21(3), pages 333-350, November.
    4. Arjan Lejour & Harrie Verbon, 1996. "Capital mobility, wage bargaining, and social insurance policies in an economic union," International Tax and Public Finance, Springer, vol. 3(4), pages 495-513, October.
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