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The Pain and Gain of Offshoring: The Effects of Tax Progression in a Segmented Labour Market

  • Silvia Rocha-Akis

Over the previous two decades, many OECD countries have lowered the degree of progressivity in their tax structures. In this paper, I investigate labour tax progression in a world characterised by a segmented labour market where the higher-paying jobs are rationed due to (i) oligopolistic market structures, (ii) insider-oriented unions and (iii) international offshoring. In this second-best world, a revenue-neutral decrease in the progressivity of the tax schedule promotes higher domestic (net-of-tax) wage inequality where a shrinking fraction of workers provides the tax revenue to finance the redistribution to an increasing share of lower-wage workers. However, as the tax reform involves an increase in the offshoring intensity, which may translate into a cost advantage for the domestic average consumer, the overall welfare effect is ambiguous. It is shown that the negative effects dominate if trade unions are sufficiently insider-oriented.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3739.

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Date of creation: 2012
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Handle: RePEc:ces:ceswps:_3739
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