O. Lorz et F. Stahler, Who is afraid of capital mobility? On taxation of labor income and the level of public services in an open economy, J ECON, 74(1), 2001, pp. 79-101
Citations number
18
Categorie Soggetti
Economics
Journal title
JOURNAL OF ECONOMICS-ZEITSCHRIFT FUR NATIONALOKONOMIE
This paper deals with the effects of international capital mobility on the
taxation of labor income and on the size of the public sector. It employs a
model of the labor market where national trade unions set the wage level i
n their country and national governments set the tax rate of a proportional
labor-income tax. The tax revenues are used to finance a public good and u
nemployment benefits. In this model, competition between the national trade
unions caused by international capital mobility leads to full employment,
and the governments supply the public good on the first best level. As no u
nemployment benefits have to be financed, the tax on labor income may decli
ne with the introduction of capital mobility. These tax cuts may even overc
ompensate the unions for the wage decline.