Incidence of an outsourcing tax on intermediate inputs

The paper uses a Hecksher-Ohlin-Samuelson type general equilibrium framework to consider the incidence of an outsourcing tax on an economy in which the production of a specific intermediate input has been fragmented and outsourced. When the input is ?non-traded?, the outsourcing tax can reduce domestic wages even if the intermediate input producing sector is the most capital-intensive sector of the economy. This implies that contrary to received wisdom, a tax on a capital-intensive sector may actually hurt labor. On the other hand, if the intermediate input is traded, the outsourcing tax must close down the final good producing sector that uses it specifically in its production. In turn, this may force the government to look for additional policy instruments to help sustain this domestic industry.