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Taxing Mobile Capital with Labor Market Imperfections

  • Wolfram F. Richter
  • Kerstin Schneider

Taxing internationally mobile factors of production has been dismissed as an inefficient means of raising tax revenue. This paper addresses the question of whether it is efficient to tax capital at source when labor markets and the taxation of lumpsum income suffer from imperfections. Four reasons for taxing capital are identified: (i) institutional constraints rendering any taxation of profit income infeasible; (ii) market power in the demand for labor; (iii) market power in the supply of labor if it increases with the employment of capital; (iv) unemployment benefits that are not tied to net real wages. It is argued that the case for taxing capital is not particularly strong. By reinterpreting capital as energy the results are applicable to the discussion about ecological tax reforms.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 477.

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Date of creation: 2001
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Handle: RePEc:ces:ceswps:_477
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  3. Richter, Wolfram F. & Schneider, Kerstin, 2003. "Energy taxation: Reasons for discriminating in favor of the production sector," European Economic Review, Elsevier, vol. 47(3), pages 461-476, June.
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  13. 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.
  14. Stefan Boeters & Kerstin Schneider, 1999. "Government versus Union. The Structure of Optimal Taxation in a Unionized Labor Market," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 56(2), pages 174-, June.
  15. Mintz, J. & Tulkens, H., . "Optimality properties of alternative systems of taxation of foreign capital income," CORE Discussion Papers RP 1212, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  16. William M. Boal & Michael R. Ransom, 1997. "Monopsony in the Labor Market," Journal of Economic Literature, American Economic Association, vol. 35(1), pages 86-112, March.
  17. Gordon, Roger H, 1986. "Taxation of Investment and Savings in a World Economy," American Economic Review, American Economic Association, vol. 76(5), pages 1086-1102, December.
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