Fighting Tax Competition in the Presence of Unemployment: Complete versus Partial Tax Coordination

Sven Wehke

No 7010, FEMM Working Papers from Otto-von-Guericke University Magdeburg, Faculty of Economics and Management

Abstract: In this paper, we analyze the welfare consequences of tax coordination agreements which cover taxes on mobile capital and immobile labor, respectively. In doing so, we take into account two important institutional details. First, we incorporate decentralized wage bargaining, giving rise to involuntary unemployment. Second, we distinguish between complete tax coordination, which effectively covers both tax instruments, and the more plausible case of partial tax coordination, where one tax is marginally increased by all countries, while the other tax rate can still be freely chosen by all countries. It is shown that complete tax coordination remains to be welfare enhancing in the presence of unemployment. In contrast, for partial tax coordination, the welfare effects become ambiguous and are different to the case of competitive labor markets.

Keywords: factor taxation; (partial) tax coordination; wage bargaining; unemployment (search for similar items in EconPapers)
JEL-codes: H21 H87 J51 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2007-03
New Economics Papers: this item is included in nep-pbe
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Citations: View citations in EconPapers (1)

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