International Spillover Effects of Sectoral Tax Differentiation in Unionized Economies

CESifo Working Paper No. 295

28 Pages Posted: 24 Aug 2000

See all articles by Bertil Holmlund

Bertil Holmlund

Uppsala University - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute); IZA Institute of Labor Economics

Ann-Sofie Kolm

Uppsala University; Institute for Labour Market Policy Evaluation

Multiple version iconThere are 2 versions of this paper

Date Written: April 2000

Abstract

The European Union has recently proposed sectoral tax differentiation as a policy to fight unemployment. The member countries are allowed to reduce the VAT rates on goods and services that are particularly labor intensive and price elastic. The paper provides a theoretical analysis of the effects of such tax reforms, with particular emphasis on the international repercussions of the policies. To that end we develop a two-country and two-sector model with monopolistic competition in the goods market and wage bargaining in the labor market. Policy externalities operate through the endogenously determined terms of trade. We examine how national and supranational commodity tax policies affect sectoral and total employment and characterize optimal commodity taxes with and without international policy cooperation. Some rough estimates of the welfare gains from policy coordination are also presented, using a calibrated version of the model.

Keywords: Economic Integration, Imperfect Competition, Wage Determination, Policy Cooperation

Suggested Citation

Holmlund, Bertil and Kolm, Ann-Sofie, International Spillover Effects of Sectoral Tax Differentiation in Unionized Economies (April 2000). CESifo Working Paper No. 295. Available at SSRN: https://ssrn.com/abstract=235485 or http://dx.doi.org/10.2139/ssrn.235485

Bertil Holmlund (Contact Author)

Uppsala University - Department of Economics ( email )

SE-75120 Uppsala
Sweden
+46 18 471 1122 (Phone)
+46 18 471 1478 (Fax)

HOME PAGE: http://www.nek.uu.se/faculty/holmlund/index.html

CESifo (Center for Economic Studies and Ifo Institute)

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IZA Institute of Labor Economics

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Ann-Sofie Kolm

Uppsala University ( email )

Department of Economics P.O. Box 513
SE-751 20 Uppsala
Sweden
+46 18 4711131 (Phone)
+46 18 4711478 (Fax)

Institute for Labour Market Policy Evaluation ( email )

Box 513
751 20 Uppsala
Sweden
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+46 18 471 7071 (Fax)

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