Incidence of an Outsourcing Tax on Intermediate Inputs
FRB of St. Louis Working Paper No. 2009-039B
12 Pages Posted: 19 Aug 2009 Last revised: 14 May 2010
Date Written: April 21, 2010
Abstract
The paper uses a Hecksher-Ohlin-Samuelson type general equilibrium framework to consider the incidence of an outsourcing tax on an economy in which the production of a specific intermediate input has been fragmented and outsourced. If the outsourced sector provides a non-traded input, the outsourcing tax can have adverse impact on labor even if it is the most capital-intensive sector of the economy. Thus contrary to expectations, a tax on a capital-intensive sector actually hurts labor. In the case where the intermediate input is traded, the outsourcing tax closes down either the intermediate input producing sector, or the final good producing sector which uses the intermediate input.
Keywords: Fragmentation, Outsourcing, Factor intensity, Tax incidence
JEL Classification: F11, F16, D33
Suggested Citation: Suggested Citation
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