International Spillover Effects of Sectoral Tax Differentiation in Unionized Economies

29 Pages Posted: 21 Mar 2001

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: May 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

JEL Classification: D43, E61, F15, J23, J64

Suggested Citation

Holmlund, Bertil and Kolm, Ann-Sofie, International Spillover Effects of Sectoral Tax Differentiation in Unionized Economies (May 2000). CESifo Working Paper Series No. 295. Available at SSRN: https://ssrn.com/abstract=263795

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)

Poschinger Str. 5
Munich, DE-81679
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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
+46 18 471 7081 (Phone)
+46 18 471 7071 (Fax)

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