Collective Bargaining and the Neutrality of Profit Taxes

Using a standard bargaining model, we investigate if profit taxes are neutral when workers’compensation is determined by collective bargaining. We provide sufficient conditions under which profit taxes are neutral. We also show by counterexamples that the violation of these conditions can lead to non-neutrality of profit taxes. We argue that the impact of profit taxes on the economy will be greater in countries where collective bargaining is prevalent than in countries where the coverage of collective bargaining is low.