Scandinavian Working Papers in Economics

Umeå Economic Studies,
Umeå University, Department of Economics

No 737: Outsourcing and Optimal Nonlinear Taxation: A Note

Thomas Aronsson () and Erkki Koskela ()
Additional contact information
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

Abstract: This paper addresses outsourcing in the two-type optimal income tax model. If the government is able to control outsourcing via a direct tax instrument, outsourcing will not affect the marginal income tax structure. In the absence of a direct tax instrument, and under the plausible assumption that higher outsourcing increases the wage differential, the government will implement a lower marginal income tax rate for the low-ability type and a higher marginal income tax rate for the high-ability type than it would otherwise have done.

Keywords: outsourcing; optimal nonlinear taxation

JEL-codes: H21; H25; J31; J62

9 pages, April 3, 2008

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