Welfare policy in the presence of unionised labour and internationally mobile firms

In oligopolistic industries that are unionised and may be affected by offshoring, falling offshoring costs have a moderating effect on trade unions. They will accept lower sector wages in order to discourage mobile forms from leaving the country. Since such wages are independent of the workers' domestic outside opportunities, wage moderation - induced by deeper economic integration - creates leeway for the government to engage in redistributive policies even if this improves the workers' domestic outside options. Only if the latter become sufficiently attractive will redistribution induce some offshoring, and it is only at that level that further economic integration will lead to both wage moderation and offshoring activities. Therefore, our analysis suggests that rather than provoking a downsizing of the welfare state, offshoring defines an upper limit for the generosity of the welfare state below which redistribution becomes less instead of more distortive. --offshoring,import competition,wage bargaining,oligopoly,redistribution

Testing the Tax Competition Theory: How Elastic are National Tax Bases in OECD Countries?

To what extent do countries' corporate income tax (CIT) rates attract foreign tax bases? What are the revenue implications of a unilateral tax reduction when tax bases are internationally mobile? These questions are explored using a panel of annual data from 17 OECD countries spanning the period 1982 to 2005. We find significant international fiscal externalities in the form of CIT-induced resource flows. The magnitude, however, indicates that the extent of international corporate tax base mobility is rather modest. Moreover, we find that, on average, a unilateral CIT reduction results in a less-than-proportional increase in the CIT base, thus reducing CIT revenues. The results are robust across a wide range of specifications and point to potential gains from international tax policy coordination.tax competition, corporate income tax base elasticity, instrumental variables, international fiscal externalities, Laffer curve, panel data estimation

Welfare policy in the presence of unionised labour and internationally mobile firms

In oligopolistic industries that are unionised and may be affected by offshoring, falling offshoring costs have a moderating effect on trade unions. They will accept lower sector wages in order to discourage mobile firms from leaving the country. Since such wages are independent of the workers' domestic outside opportunities, wage moderation - induced by deeper economic integration - creates leeway for the government to engage in redistributive policies even if this improves the workers' domestic outside options. Only if the latter become suffciently attractive will redistribution induce some offshoring, and it is only at that level that further economic integration will lead to both wage moderation and offshoring activities. Therefore, our analysis suggests that rather than provoking a downsizing of the welfare state, offshoring defines an upper limit for the generosity of the welfare state below which redistribution becomes less instead of more distortive

Labour tax policies and strategic offshoring under unionised oligopoly

In a model with a unionised immobile labour force we analyse how labour taxes and transfers towards unemployed workers are optimally chosen when a welfare maximising government faces oligopolistic and partly mobile firms. We consider two polar types of government: one whose objective consists of aximising the sum of domestic producer's and consumers' surplus and one that aims at maximising employed and unemployed workers' payoffs. We show that depending on the combination of foreign labour costs, the degree of domestic union bargaining power, and the sunk costs of relocation, the former type of government may choose to set taxes so as to induce an outward relocation of production. (author's abstract)Series: Department of Economics Working Paper Serie

Testing the tax competition theory: How elastic are national tax bases in western Europe?

In this paper, we test one of the fundamental assumptions in the tax competition literature, namely, that a country's taxable income depends on the tax policies pursued in the domestic and in neighbouring countries. Based on a panel of annual data of 14 western European countries spanning the period 1982 to 2004, we show that the common trend in falling corporate income tax (CIT) rates can in part be explained by the existence of fiscal externalities in the form of international resource flows. Our results confirm the presumption put forward in recent empirical tax reaction function studies, that interdependent tax setting behaviour is evidence of tax competition. However, taxable corporate income is shown to react inelastically to domestic and to foreign tax rates. Thus, the observed rise in CIT revenues in Europe between 1982 and 2004 cannot be explained by the trend in falling CIT rates. Moreover, we find that large countries' tax bases are more responsive to neighbouring countries' tax policies, which is in contrast to the classic asymmetric tax competition literature. (author's abstract)Series: Department of Economics Working Paper Serie

Labour tax policies and strategic offshoring under unionised oligopoly

In a model with a unionised immobile labour force we analyse how labour taxes and transfers towards unemployed workers are optimally chosen when a welfare maximising government faces oligopolistic and partly mobile firms. We consider two polar types of government: one whose objective consists of maximising the sum of domestic producer's and consumers' surplus and one that aims at maximising employed and unemployed workers' payoffs. We show that depending on the combination of foreign labour costs, the degree of domestic union bargaining power, and the sunk costs of relocation, the former type of government may choose to set taxes so as to induce an outward relocation of production.

Social partnership and macroeconomic performance

For decades, the impact that pivotal economic and political institutions have on distinct aspects of overall economic performance has attracted researchers of various fields. One central question concerns the extent to which a country's degree of social partnership is related to important macro-political variables such as economic growth, unemployment, employment and the distribution of income. For a sample of 16 European countries covering the period of 1990 to 2012, the article presents evidence which is consistent with the view that a strong social partnership is associated with better-than-average macroeconomic performance, both in general and in the wake of the latest financial and economic crisis

Testing the tax competition theory: How elastic are national tax bases in western Europe?

In this paper, we test one of the fundamental assumptions in the tax competition literature, namely, that a country’s taxable income depends on the tax policies pursued in the domestic and in neighbouring countries. Based on a panel of annual data of 14 western European countries spanning the period 1982 to 2004, we show that the common trend in falling corporate income tax (CIT) rates can in part be explained by the existence of fiscal externalities in the form of international resource flows. Our results confirm the presumption put forward in recent empirical tax reaction function studies, that interdependent tax setting behaviour is evidence of tax competition. However, taxable corporate income is shown to react inelastically to domestic and to foreign tax rates. Thus, the observed rise in CIT revenues in Europe between 1982 and 2004 cannot be explained by the trend in falling CIT rates. Moreover, we find that large countries’ tax bases are more responsive to neighbouring countries’ tax policies, which is in contrast to the classic asymmetric tax competition literature.