Optimal Income Taxation, Outsourcing and Policy Cooperation in a Dynamic Economy

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 784, Umeå Economic Studies from Umeå University, Department of Economics

Abstract: This paper concerns optimal income taxation in a two-country OLG economy, where each country is characterized by asymmetric information between the government and the private sector, and where one of the countries outsources part of its production to the other. In the country whose firms outsource production abroad, the government will respond to outsourcing by implementing a more progressive labor income tax structure and higher marginal capital income tax rates than it would have done in the absence of outsourcing. The tax policy response by the government in the country that receives foreign production capacity is, in general, ambiguous and depends on a tradeoff between wage-equality and factor income from abroad. By using the noncooperative Nash equilibrium as a reference case, we also consider tax policy cooperation leading to higher welfare.

Keywords: Outsourcing; redistribution; optimal nonlinear taxation; intertemporal model (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-dge and nep-pub
Date: 2009-10-02
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Persistent link: http://EconPapers.repec.org/RePEc:hhs:umnees:0784

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