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Incidence of an outsourcing tax on intermediate inputs

  • Subhayu Bandyopadhyay

The paper uses a Hecksher-Ohlin-Samuelson type general equilibrium framework to consider the incidence of an outsourcing tax on an economy in which the production of a specific intermediate input has been fragmented and outsourced. When the input is ?non-traded?, the outsourcing tax can reduce domestic wages even if the intermediate input producing sector is the most capital-intensive sector of the economy. This implies that contrary to received wisdom, a tax on a capital-intensive sector may actually hurt labor. On the other hand, if the intermediate input is traded, the outsourcing tax must close down the final good producing sector that uses it specifically in its production. In turn, this may force the government to look for additional policy instruments to help sustain this domestic industry.

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2009-039.

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Date of creation: 2009
Date of revision:
Handle: RePEc:fip:fedlwp:2009-039
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  1. Head, Keith & Mayer, Thierry & Ries, John, 2009. "How remote is the offshoring threat?," European Economic Review, Elsevier, vol. 53(4), pages 429-444, May.
  2. Jim Markusen & Anthony Venables, 2005. "A Multi-Country Approach to Factor Proporations Trade and Trade Costs," The Institute for International Integration Studies Discussion Paper Series iiisdp051, IIIS.
  3. Leamer, Edward E, 1996. "Wage Inequality from International Competition and Technological Change: Theory and Country Experience," American Economic Review, American Economic Association, vol. 86(2), pages 309-14, May.
  4. Arndt, Sven W., 1997. "Globalization and the open economy," The North American Journal of Economics and Finance, Elsevier, vol. 8(1), pages 71-79.
  5. Gene M. Grossman & Esteban Rossi-Hansberg, 2008. "Trading Tasks: A Simple Theory of Offshoring," American Economic Review, American Economic Association, vol. 98(5), pages 1978-97, December.
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