Optimal Redistributive Taxation and Provision of Public Input Goods in an Economy with Outsourcing and Unemployment

31 Pages Posted: 8 Dec 2008

See all articles by Thomas Aronsson

Thomas Aronsson

University of Umea - Department of Economics; Uppsala University

Erkki Koskela

University of Helsinki - Department of Political and Economic Studies; CESifo (Center for Economic Studies and Ifo Institute); Bank of Finland - Research Department; IZA Institute of Labor Economics

Multiple version iconThere are 2 versions of this paper

Date Written: December 2008

Abstract

This paper concerns optimal redistributive income taxation and provision of a public input good in a two-type model with a minimum wage policy implemented for the low-ability type, where firms may use some of their resources for outsourcing by locating part of the production process abroad. Our results show that the incentive to relax the self-selection constraint and the incentive to increase employment among the low-skilled reinforce each other in terms of marginal income taxation. In addition, the appearance of equilibrium unemployment also provides an incentive for the government to directly tax outsourcing. Without a direct instrument for taxing outsourcing, the government may reduce the amount of resources spent on outsourcing by increased provision of the public input good, which is desirable in the sense that reduced outsourcing contributes to less wage inequality and increased employment.

Keywords: outsourcing, optimal nonlinear taxation, public goods, unemployment

JEL Classification: H21, H25, J31, J62

Suggested Citation

Aronsson, Thomas and Koskela, Erkki, Optimal Redistributive Taxation and Provision of Public Input Goods in an Economy with Outsourcing and Unemployment (December 2008). CESifo Working Paper Series No. 2481. Available at SSRN: https://ssrn.com/abstract=1313015

Thomas Aronsson

University of Umea - Department of Economics ( email )

Umeå University
Umea, SE - 90187
Sweden

Uppsala University

Box 513
Uppsala, 751 20
Sweden

Erkki Koskela (Contact Author)

University of Helsinki - Department of Political and Economic Studies ( email )

P.O. Box 54
FIN-00014 Helsinki
Finland
+358 9 191 8894 (Phone)
+358 9 191 8877 (Fax)

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CESifo (Center for Economic Studies and Ifo Institute)

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Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Bank of Finland - Research Department ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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