Joint discussion paper series in economics 2009,40
In a multi-country general equilibrium economy with mobile capital and rigid-wage unemployment, countries may differ in capital endowments, production technologies and rigid wages. Governments tax capital at the source to maximize national welfare. They account for tax base responses to their tax and take as given the world-market interest rate. We specify conditions under which - in contrast to free trade with undistorted labor markets - welfare declines and unemployment increases in some countries (i) when moving from autarky to trade without taxation and/or (ii) when moving from trade without taxation to tax competition.
capital taxation asymmetric tax competition rigid wages unemployment losses from trade