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
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
9 pages, April 3, 2008
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