Optimal Capital Taxation in Economies with Unionized and Competitive Labour Markets

Posted: 29 Feb 2008

See all articles by Ronnie Schöb

Ronnie Schöb

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

Date Written: October 2005

Abstract

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

JEL Classification: H21; J51; C70

Suggested Citation

Schöb, Ronnie, Optimal Capital Taxation in Economies with Unionized and Competitive Labour Markets (October 2005). Oxford Economic Papers, Vol. 57, Issue 4, pp. 717-731, 2005. Available at SSRN: https://ssrn.com/abstract=916851

Ronnie Schöb

Freie Universitaet Berlin ( email )

Boltzmannstraße 20
Berlin, Berlin 14195
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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