Optimal Capital Taxation in Economies with Unionised and Competitive Labour Markets

20 Pages Posted: 9 Jan 2003

See all articles by Erkki Koskela

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

Ronnie Schöb

CESifo (Center for Economic Studies and Ifo Institute); Freie Universitaet Berlin

Date Written: December 2002

Abstract

According to the existing literature, capital taxes should not be imposed in the presence of optimal profit taxation in either unionised or competitive labour markets. We show that this conclusion does not hold for an economy with both competitive and unionised sectors, where the competitive wage rate provides the outside option for unionised workers. Even with non-distortionary profit taxation it is optimal for such an economy to tax capital if the revenue share of capital in the unionised sector is lower than the revenue share of capital in the competitive sector. This is because taxing capital income reduces employment and lowers the outside option of workers in the unionised sector with the latter effect being stronger. A capital subsidy should be granted if the opposite relationship in terms of revenue shares holds.

Keywords: Optimal Capital Taxation, Unionised and Competitive Labour Markets, Outside Option

JEL Classification: H21, J51, C70

Suggested Citation

Koskela, Erkki and Schöb, Ronnie and Schöb, Ronnie, Optimal Capital Taxation in Economies with Unionised and Competitive Labour Markets (December 2002). Available at SSRN: https://ssrn.com/abstract=367164 or http://dx.doi.org/10.2139/ssrn.367164

Erkki Koskela

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)

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CESifo (Center for Economic Studies and Ifo Institute)

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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

Ronnie Schöb (Contact Author)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Freie Universitaet Berlin ( email )

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Berlin, Berlin 14195
Germany

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