How labor market rigidities shape business taxation in a global economy?

Nelly Exbrayat (1) , Carl Gaigné (2) , Stéphane Riou (3)

1 CERDI - Centre d'Études et de Recherches sur le Développement International
2 Unité d'économie et sociologie rurales de rennes
3 GATE Lyon Saint-Étienne - Groupe d'Analyse et de Théorie Economique Lyon - Saint-Etienne

We investigate the impact of trade liberalization upon the taxation of capital within a context of labor market rigidities. Using a model of trade and location, we show that labor market imperfections not only strengthen tax competition but also affect the relationship between trade integration and tax policies. Capital taxation follows a J-shaped relationship with trade costs when labor markets are flexible, whereas it may increase with falling trade costs in the presence of trade unions acting as Stackelberg leaders or playing simultaneously with governments. In addition, we analyze the outcome which arises from di§erences between the various countries' labor market institutions. Trade liberalization reduces the international differences in wage and capital taxation, making the unionized country more attractive.

Mots clés: Tax competition; unions; capital mobility; trade integration

Domaines: Economies et finances

Nelly Exbrayat, Carl Gaigné, Stéphane Riou. How labor market rigidities shape business taxation in a global economy?. 2010. ⟨halshs-00537021⟩