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Gains and Losses from Tax Competition with Migration

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Author Info
Honkapohja ,S.
Turunen-Red, A.

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Abstract

We consider international labour (entrepreneur) mobility in a two-country overlapping-generations model. Interactions of decreasing and increasing returns in production yield multiple equilibria that are stable under adaptive learning. Governments have a unilateral incentive to reduce income taxes at the joint optimum. We compare the Nash equlibrium in taxes under full labour mobility to the closed economy with no mobility. Despite strategic tax setting, the free mobility outcome is often better in welfare terms. Large, discrete gains in welfare may be attained because of the tax competition. Expectational barriers for discrete welfare improvements can be overcome through tax competition.

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Publisher Info
Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0416.

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Length: 36
Date of creation: Feb 2004
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Handle: RePEc:cam:camdae:0416

Note: Ma, PE
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Related research
Keywords: tax policy; mobility of labour; multiple equilibria; expectation traps;

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Find related papers by JEL classification:
H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods
F22 - International Economics - - International Factor Movements and International Business - - - International Migration
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  2. Sinn, Hans-Werner, 2000. "EU Enlargement and the Future of the Welfare State," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  3. Edwards, Jeremy & Keen, Michael, 1996. "Tax competition and Leviathan," European Economic Review, Elsevier, vol. 40(1), pages 113-134, January. [Downloadable!] (restricted)
    Other versions:
  4. Devereux, Michael P & Lockwood, Ben & Redoano, Michela, 2002. "Do Countries Compete over Corporate Tax Rates?," CEPR Discussion Papers 3400, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  5. David E. Wildasin, 2000. "Factor mobility and fiscal policy in the EU: policy issues and analytical approaches," Economic Policy, CEPR, CES, MSH, vol. 15(31), pages 337-378, October. [Downloadable!] (restricted)
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  6. Breyer, Friedrich & Kolmar, Martin, 2002. "Are national pension systems efficient if labor is (im)perfectly mobile?," Journal of Public Economics, Elsevier, vol. 83(3), pages 347-374, March. [Downloadable!] (restricted)
  7. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66, pages 467. [Downloadable!] (restricted)
  8. Seppo Honkapohja & Arja Turunen-Red, 2002. "Complementarity, growth, and trade," Canadian Journal of Economics, Canadian Economics Association, vol. 35(3), pages 495-516, August. [Downloadable!] (restricted)
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  9. Richard E. Baldwin & Paul Krugman, 2002. "Agglomeration, Integration and Tax Harmonization," NBER Working Papers 9290, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. Hans-Werner Sinn, 2004. "The New Systems Competition," Perspektiven der Wirtschaftspolitik, Blackwell Publishing, vol. 5(1), pages 23-38, 02. [Downloadable!] (restricted)
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Cited by:
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  1. Filippo Occhino, 2005. "Optimal Fiscal Policy When Migration is Feasible," Departmental Working Papers 200507, Rutgers University, Department of Economics. [Downloadable!]
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