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Fighting Tax Competition in the Presence of Unemployment: Complete versus Partial Tax Coordination

  • Sven Wehke

    ()

    (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)

In this paper, we analyze the welfare consequences of tax coordination agreements which cover taxes on mobile capital and immobile labor, respectively. In doing so, we take into account two important institutional details. First, we incorporate decentralized wage bargaining, giving rise to involuntary unemployment. Second, we distinguish between complete tax coordination, which effectively covers both tax instruments, and the more plausible case of partial tax coordination, where one tax is marginally increased by all countries, while the other tax rate can still be freely chosen by all countries. It is shown that complete tax coordination remains to be welfare enhancing in the presence of unemployment. In contrast, for partial tax coordination, the welfare effects become ambiguous and are different to the case of competitive labor markets.

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File URL: http://www.ww.uni-magdeburg.de/fwwdeka/femm/a2007_Dateien/2007_10.pdf
File Function: First version, 2007
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Paper provided by Otto-von-Guericke University Magdeburg, Faculty of Economics and Management in its series FEMM Working Papers with number 07010.

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Length: 31 pages
Date of creation: Mar 2007
Date of revision:
Handle: RePEc:mag:wpaper:07010
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  7. Guesnerie, Roger & Laffont, Jean-Jacques, 1978. "Taxing price makers," Journal of Economic Theory, Elsevier, vol. 19(2), pages 423-455, December.
  8. Keen, Michael & Marchand, Maurice, 1997. "Fiscal competition and the pattern of public spending," Journal of Public Economics, Elsevier, vol. 66(1), pages 33-53, October.
  9. Aronsson, Thomas & Wehke, Sven, 2006. "Public Goods, Unemployment and Policy Coordination," Umeå Economic Studies 700, Umeå University, Department of Economics.
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  12. MARCHAND, Maurice & PESTIEAU, Pierre & SATO, Motohiro, 2002. "Can partial fiscal coordination be welfare worsening ? A model of tax competition," CORE Discussion Papers 2002052, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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  18. Erkki Koskela & Ronnie Schöb, 2000. "Optimal Factor Income Taxation in the Presence of Unemployment," CESifo Working Paper Series 279, CESifo Group Munich.
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  21. Huber, Bernd, 1999. "Can Tax Coordination Work?," Munich Reprints in Economics 19403, University of Munich, Department of Economics.
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