Welfare Policies, Labor Taxation and International Integration

28 Pages Posted: 23 Apr 2001

See all articles by Torben M. Andersen

Torben M. Andersen

University of Aarhus - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Date Written: April 2001

Abstract

How will international integration affect welfare policies? This paper considers the possibilities of financing public sector activities (public consumption and social security expenses) by general (wage) taxation in an economy which becomes more integrated in international product markets. Even if labor is internationally immobile, the increased mobility of products and hence jobs implies a change in the distortions arising from taxes and social security contributions levied on labor income. Since financing of social security via general taxation involves a negative externality the effects of international integration depend critically on the institutional structure of the labor market. This paper shows that increased international integration inducing more product market competition implies that it becomes more costly to maintain welfare systems financed by general taxation.

Keywords: Product Market Integration, Tax Distortions, Social Security, Public Consumption

JEL Classification: F10, J30, H20, H30

Suggested Citation

Andersen, Torben M., Welfare Policies, Labor Taxation and International Integration (April 2001). Available at SSRN: https://ssrn.com/abstract=267216

Torben M. Andersen (Contact Author)

University of Aarhus - Department of Economics ( email )

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