Optimal Income Taxation, Outsourcing and Policy Cooperation in a Dynamic Economy

38 Pages Posted: 21 Sep 2009

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

Date Written: September 2009

Abstract

This paper concerns optimal income taxation in a two-country OLG economy, where each country is characterized by asymmetric information between the government and the private sector, and where one of the countries outsources part of its production to the other. In the country whose firms outsource production abroad, the government will respond to outsourcing by implementing a more progressive labor income tax structure and higher marginal capital income tax rates than it would have done in the absence of outsourcing. The tax policy response by the government in the country that receives foreign production capacity is, in general, ambiguous and depends on a tradeoff between wage-equality and factor income from abroad. By using the noncooperative Nash equilibrium as a reference case, we also consider tax policy cooperation leading to higher welfare.

Keywords: outsourcing, redistribution, optimal nonlinear taxation, intertemporal model

JEL Classification: H21, H25, J31, J62

Suggested Citation

Aronsson, Thomas and Koskela, Erkki, Optimal Income Taxation, Outsourcing and Policy Cooperation in a Dynamic Economy (September 2009). CESifo Working Paper Series No. 2776. Available at SSRN: https://ssrn.com/abstract=1476209

Thomas Aronsson

University of Umea - Department of Economics ( email )

UmeƄ 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)

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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