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

30 Pages Posted: 1 Jun 2009  

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

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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 outsource part of the production process abroad, and where outsourcing is substitutable for domestic low-ability labor. Our results show that the incentives for the government to relax the self-selection constraint and to increase the employment among the low-skilled reinforce each other in terms of marginal income taxation; both of them contribute to increase the marginal income tax rate implemented for the low-ability type and decrease the marginal income tax rate implemented for the high-ability type. The appearance of equilibrium unemployment also constitutes an incentive to implement a tax on 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 leads 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. IZA Discussion Paper No. 4196. Available at SSRN: https://ssrn.com/abstract=1412274

Thomas Aronsson (Contact Author)

University of Umea - Department of Economics ( email )

Umeå University
Umea, SE - 90187
Sweden

Uppsala University

Box 513
Uppsala, 751 20
Sweden

Erkki Koskela

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)

HOME PAGE: http://www.cesifo.de/servlet/page?_pageid=56&_dad=portal30&_schema=PORTAL30&pa_id=7298

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
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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