Tax Coordination and Unemployment

This paper analyses the implications of unemployment for fiscal competition and tax coordination among small open economies. Unemployment is modeled as resulting from wage bargaining. The analysis focuses on the effect of labour and capital tax coordination on welfare. We show that, while coordinated capital and labour tax increases unambiguously raise welfare if labour markets are competitive, different results emerge if labour markets are unionised. It turns out that coordinated capital and labour tax increases may reduce welfare. This revised version was published online in July 2006 with corrections to the Cover Date.