How labor market rigidities shape business taxation in a global economy ?

Nelly Exbrayat, Carl Gaigné and Stéphane Riou ()
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Nelly Exbrayat: CERDI-CNRS, Université d'Auvergne
Carl Gaigné: INRA, UMR1302, SMART, 4, allée Bobierre, F-35000 Rennes
Stéphane Riou: Université de Lyon, Lyon, F-69003, France ; Université Jean Monnet ; CNRS, GATE Lyon St Etienne, Saint-Etienne, F-42000, France

No 1028, Working Papers from Groupe d'Analyse et de Théorie Economique Lyon St-Etienne (GATE Lyon St-Etienne), Université de Lyon

Abstract: We investigate the impact of trade liberalization upon the taxation of capital within a context of labor market rigidities. Using a model of trade and location, we show that labor market imperfections not only strengthen tax competition but also affect the relationship between trade integration and tax policies. Capital taxation follows a J-shaped relationship with trade costs when labor markets are flexible, whereas it may increase with falling trade costs in the presence of trade unions acting as Stackelberg leaders or playing simultaneously with governments. In addition, we analyze the outcome which arises from differences between the various countries’ labor market institutions. Trade liberalization reduces the international differences in wage and capital taxation, making the unionized country more attractive.

Keywords: tax competition; unions; capital mobility; trade integration (search for similar items in EconPapers)
JEL-codes: F12 F16 H25 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2010
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Persistent link: https://EconPapers.repec.org/RePEc:gat:wpaper:1028

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