Why Governments should Tax Mobile Capital in the resence of Unemployment

Erkki Koskela and Ronnie Schöb
Authors registered in the RePEc Author Service: Ronnie Schoeb

No 175, CESifo Working Paper Series from CESifo

Abstract: This paper shows that a small open economy should levy positive source-based taxes on capital income to fight involuntary unemployment and increase welfare. A revenue-neutral tax reform which increases the capital tax rate and reduces the labour tax rate will induce firms to substitute labour for capital. Such a tax will lower marginal cost of production, increase output, and reduce unemployment as long as labour tax rate exceeds the capital tax rate. The result holds even though trade unions might succeed in subsequently increasing the net-of-tax wage rate if the elasticity of substitution between capital and labour is above a critical value which is itself below one. Independent of the elasticity of substitution, the government can promote wage moderation by increasing the personal tax credit instead of reducing the labour tax rate.

Keywords: Capital Taxation; Labour Taxation; Involuntary Unemployment; Trade Unions (search for similar items in EconPapers)
Date: 1998
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Why Governments Should Tax Mobile Capital in the Presence of Unemployment (2002)
Working Paper: Why Governments Should Tax Mobile Capital in the Presence of Unemployment
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_175

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