 Why Governments Should Tax Mobile Capital in the Presence of UnemploymentErkki Koskela and
Ronnie Schöb
No 98-08, EPRU Working Paper Series from Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics 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. Even though trade unions might succeed in subsequently increasing the net-of-tax wage rate, such a tax reform will lower marginal cost of production, increase output, and reduce unemployment as long as the labour tax rate exceeds the capital tax rate if elasticity of substitution 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. References: Add references at CitEc There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it. Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:kud:epruwp:98-08 Access Statistics for this paper More papers in EPRU Working Paper Series from Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics �ster Farimagsgade 5, Building 26, DK-1353 Copenhagen K., Denmark. Contact information at EDIRC. |
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