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Optimal Income Taxation, Outsourcing and Policy Cooperation in a Dynamic Economy


  • Aronsson, Thomas

    () (Department of Economics, Umeå University)

  • Koskela, Erkki

    () (Department of Economics)


This paper concerns optimal income taxation in a two-country OLG economy, where each country is characterized by asymmetric information between the government and the private sector, and where one of the countries outsources part of its production to the other. In the country whose firms outsource production abroad, the government will respond to outsourcing by implementing a more progressive labor income tax structure and higher marginal capital income tax rates than it would have done in the absence of outsourcing. The tax policy response by the government in the country that receives foreign production capacity is, in general, ambiguous and depends on a tradeoff between wage-equality and factor income from abroad. By using the noncooperative Nash equilibrium as a reference case, we also consider tax policy cooperation leading to higher welfare.

Suggested Citation

  • Aronsson, Thomas & Koskela, Erkki, 2009. "Optimal Income Taxation, Outsourcing and Policy Cooperation in a Dynamic Economy," Umeå Economic Studies 784, Umeå University, Department of Economics.
  • Handle: RePEc:hhs:umnees:0784

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    References listed on IDEAS

    1. Hamilton, Kirk & Clemens, Michael, 1999. "Genuine Savings Rates in Developing Countries," World Bank Economic Review, World Bank Group, vol. 13(2), pages 333-356, May.
    2. Martin L. Weitzman, 1976. "On the Welfare Significance of National Product in a Dynamic Economy," The Quarterly Journal of Economics, Oxford University Press, vol. 90(1), pages 156-162.
    3. Swan, Trevor W, 2002. "Economic Growth," The Economic Record, The Economic Society of Australia, vol. 78(243), pages 375-380, December.
    4. Asheim, Geir B, 1994. " Net National Product as an Indicator of Sustainability," Scandinavian Journal of Economics, Wiley Blackwell, vol. 96(2), pages 257-265.
    5. Hamilton, Kirk, 1994. "Green adjustments to GDP," Resources Policy, Elsevier, vol. 20(3), pages 155-168, September.
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    More about this item


    Outsourcing; redistribution; optimal nonlinear taxation; intertemporal model;

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J62 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Job, Occupational and Intergenerational Mobility; Promotion

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