Optimal Redistributive Taxation and Provision of Public Input Goods in an Economy with Outsourcing and Unemployment

Thomas Aronsson () and Erkki Koskela ()
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Thomas Aronsson: Department of Economics, Umeå University, Postal: S 901 87 Umeå, Sweden
Erkki Koskela: Department of Economics, Postal: P.O. Box 17 (Arkadiankatu 17), University of Helsinki, 00014 Helsinki, Finland

No 759, Umeå Economic Studies from Umeå University, Department of Economics

Abstract: This paper concerns optimal redistributive income taxation and provision of a public input good in a two-type model with a minimum wage policy implemented for the low-ability type, where firms may use some of their resources for outsourcing by locating part of the production process abroad. Our results show that the incentive to relax the self-selection constraint and the incentive to increase employment among the low-skilled reinforce each other in terms of marginal income taxation. In addition, the appearance of equilibrium unemployment also provides an incentive for the government to directly tax outsourcing. Without a direct instrument for taxing outsourcing, the government may reduce the amount of resources spent on outsourcing by increased provision of the public input good, which is desirable in the sense that reduced outsourcing contributes to less wage inequality and increased employment.

Keywords: outsourcing; optimal nonlinear taxation; public goods; unemployment (search for similar items in EconPapers)
JEL-codes: H21 H25 J31 J62 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-lab, nep-pbe and nep-pub
Date: 2008-11-27
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Persistent link: http://EconPapers.repec.org/RePEc:hhs:umnees:0759

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