Optimal Factor Income Taxation in the Presence of Unemployment

Abstract

According to conventional wisdom internationally mobile capital should not be taxed or should be taxed at a lower rate than labour. An important underlying assumption behind this view is that there are no market imperfections, in particular that labour markets clear competitively. At least for Europe, which has been suffering from high unemployment for a long time, this assumption does not seem appropriate. This paper studies the optimal factor taxation in the presence of unemployment which results from the union-firm wage bargaining both with optimal and restricted profit taxation when capital is internationally mobile and labour immobile. In setting tax rates the government is assumed to behave as a Stackelberg leader towards the private sector playing a Nash game. The main conclusion is that in the presence of unemployment, the conventional wisdom turns on its head; capital should generally be taxed at a higher rate than labour.

The Double Dividend Hypothesis of Environmental Taxes: A Survey

“…As long as an increase in the labour tax rate increases the gross wage rate however, the absolute value of the elasticity is below one (cf. Koskela and Schöb (2002a) for a proof), which is also in conformity with empirical studies [cf. e.g.…”

Taxing multi-nationals under union wage bargaining

“…Firstly, the model is closely related to the literature on international tax coordination. For example, Fuest and Huber (1999) and Koskela and Schöb (2002) investigate capital and labour taxation in open economies with union wage bargaining. However, both studies assume nationally operating firms, whereas our results are driven by the presence of multi-national corporations.…”

A Public Finance Perspective on Climate Policy: Six Interactions That May Enhance Welfare

“…As summarized by Bovenberg (1999) and Goulder (2013), this includes situations when clean goods are better substitutes for leisure than dirty goods, but consumption is uniformly taxed; when taxation imposes different marginal excess burdens on different factors; when polluting activities are initially subsidized; when the environmental tax (partially) falls on Ricardian rents from a fixed factor used in the production of polluting goods (Bento and Jacobsen, 2007); or when labor markets are imperfect (Koskela et al, 1998;Koskela and Schöb, 2002;Schöb, 2005). A related effect is the potential reduction of the informal sector (and broadening of the labor tax base) that may result from an environmental tax swap (Markandya et al, 2013).…”