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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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File URL: http://research.stlouisfed.org/wp/2009/2009-039.pdf
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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
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Handle: RePEc:fip:fedlwp:2009-039
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  1. Keith Head & Thierry Mayer & John Ries, 2008. "How Remote is the Offshoring Threat ?," Sciences Po publications info:hdl:2441/10143, Sciences Po.
  2. Arndt, Sven W., 1997. "Globalization and the open economy," The North American Journal of Economics and Finance, Elsevier, vol. 8(1), pages 71-79.
  3. Markusen, James R. & Venables, Anthony J, 2005. "A Multi-Country Approach to Factor-Proportions Trade and Trade Costs," CEPR Discussion Papers 4872, C.E.P.R. Discussion Papers.
  4. 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.
  5. Gene M. Grossman & Esteban Rossi-Hansberg, 2006. "Trading Tasks: A Simple Theory of Offshoring," NBER Working Papers 12721, National Bureau of Economic Research, Inc.
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