How Labor Market Rigidities Shape Business Taxation in a Global Economy?


GATE Working Paper No. 1028

35 Pages Posted: 27 Dec 2010

See all articles by Nelly Exbrayat

Nelly Exbrayat

University of Lyon 2 - Groupe d'Analyse et de Théorie Economique (GATE)

Carl Gaigne

French National Institute for Agricultural Research (INRA) - UMR 1302 SMART

Stephane Riou

GATE Lyon-Saint-Etienne

Date Written: 2010

Abstract

We investigate the impact of trade liberalization upon the taxation of capital within a context of labor market rigidities. Using a model of trade and location, we show that labor market imperfections not only strengthen tax competition but also affect the relationship between trade integration and tax policies. Capital taxation follows a J-shaped relationship with trade costs when labor markets are flexible, whereas it may increase with falling trade costs in the presence of trade unions acting as Stackelberg leaders or playing simultaneously with governments. In addition, we analyze the outcome which arises from differences between the various countries’ labor market institutions. Trade liberalization reduces the international differences in wage and capital taxation, making the unionized country more attractive.

Keywords: Tax competition, unions, capital mobility, trade integration

JEL Classification: F12, F16, H25

Suggested Citation

Exbrayat, Nelly and Gaigne, Carl and Riou, Stephane, How Labor Market Rigidities Shape Business Taxation in a Global Economy?
 (2010). GATE Working Paper No. 1028, Available at SSRN: https://ssrn.com/abstract=1731542 or http://dx.doi.org/10.2139/ssrn.1731542

Nelly Exbrayat

University of Lyon 2 - Groupe d'Analyse et de Théorie Economique (GATE) ( email )

93, chemin des Mouilles
Ecully, 69130
France

Carl Gaigne (Contact Author)

French National Institute for Agricultural Research (INRA) - UMR 1302 SMART ( email )

4 allée Adolphe Bobierre
CS 61103
Rennes Cedex, 35011
France

Stephane Riou

GATE Lyon-Saint-Etienne ( email )

34, rue Francis Baulier
Saint-Etienne, 42023
France

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