12.07.2015 Views

Part 1 - AL-Tax

Part 1 - AL-Tax

Part 1 - AL-Tax

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International <strong>Tax</strong>ation Handbookproduction and location decisions. Their model introduces (as in Jorgenson, 1963)a second production factor (labor) in computing the tax wedge between the marginalcost of production with and without taxes. Including a second input enablesone to consider the substitution between them. Hence, the firm’s maximizationproblem is now:max ρt[ bFKqLIt , L) τYϖL τL qI, ,t t]0∫ e ( (1 ) dt st ..(2) and F F( K,L),where labor price is assumed to be fixed and therefore taxes are fully borne by thefirm. If payroll taxes (τ L ) are deducted from the corporate income tax, we havethat taxable income is equal to:Y b F( K, L) Aq I w(1 τ) L.t t t t LSolving first the firm’s present value cost minimization problem for a constant levelof output:min e t( L(1 LIL)(1 ) (1 A) qtI)d t., ∫ρ ϖ τ τ 0We define the current-value Hamiltonian as:The FOCs are:H wL(1 τ )(1 τ) (1 A) q I λ( I δK) ν ( F( K, L)F).In the steady state we have:Lw(1 τ )(1 τ) νF 0L(1 Aq) λ 0itλρλλδν F .tKLFFkLqt(1 A)( ρδ )w(1 τ )(1 τ) ,Land using equation (2.5), we find that the usual marginal rate of technical substitutionequals the ratio of input costs:FFKL( p δ)w(1 τ) .L32

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