Scandinavian Working Papers in Economics
Umeå Economic Studies,
Umeå University, Department of Economics
No 759: Optimal Redistributive Taxation and Provision of Public Input Goods in an Economy with Outsourcing and Unemployment
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 concerns optimal redistributive income taxation and provision of a public input good in a two-type model with a minimum wage policy implemented for the low-ability type, where firms may use some of their resources for outsourcing by locating part of the production process abroad. Our results show that the incentive to relax the self-selection constraint and the incentive to increase employment among the low-skilled reinforce each other in terms of marginal income taxation. In addition, the appearance of equilibrium unemployment also provides an incentive for the government to directly tax outsourcing. Without a direct instrument for taxing outsourcing, the government may reduce the amount of resources spent on outsourcing by increased provision of the public input good, which is desirable in the sense that reduced outsourcing contributes to less wage inequality and increased employment.
Keywords: outsourcing; optimal nonlinear taxation; public goods; unemployment
26 pages, November 27, 2008
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