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Gains and Losses from Tax Competition with Migration

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  • Honkapohja ,S.
  • Turunen-Red, A.

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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File URL: http://www.econ.cam.ac.uk/research/repec/cam/pdf/cwpe0416.pdf
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Bibliographic 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
Date of revision:
Handle: RePEc:cam:camdae:0416

Note: Ma, PE
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Web page: http://www.econ.cam.ac.uk/index.htm

Related research

Keywords: tax policy; mobility of labour; multiple equilibria; expectation traps;

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  1. Jeremy Edwards & Michael Keen, 1994. "Tax competition and Leviathon," IFS Working Papers W94/07, Institute for Fiscal Studies.
  2. Hans-Werner Sinn, 2001. "The New Systems Competition," CESifo Working Paper Series 623, CESifo Group Munich.
  3. Sinn, Hans-Werner, 2002. "EU Enlargement and the Future of the Welfare State," Scottish Journal of Political Economy, Scottish Economic Society, vol. 49(1), pages 104-15, February.
  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.
  5. Honkapohja, S. & Turunen-Red, A., 1999. "Complementarity, Growth and Trade," University of Helsinki, Department of Economics 461, Department of Economics.
  6. David E. Wildasin, 2000. "Factor Mobility and Fiscal Policy in the EU: Policy Issues and Analytical Approaches," CESifo Working Paper Series 344, CESifo Group Munich.
  7. Persson, Torsten & Tabellini, Guido, 1992. "The Politics of 1992: Fiscal Policy and European Integration," Review of Economic Studies, Wiley Blackwell, vol. 59(4), pages 689-701, October.
  8. Baldwin, Richard E. & Krugman, Paul, 2004. "Agglomeration, integration and tax harmonisation," European Economic Review, Elsevier, vol. 48(1), pages 1-23, February.
  9. 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.
  10. Wilson, John Douglas, 1999. "Theories of Tax Competition," National Tax Journal, National Tax Association, vol. 52(n. 2), pages 269-304, June.
  11. 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.
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Cited by:
  1. Occhino Filippo, 2008. "Optimal Fiscal Policy When Migration Is Feasible," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 8(1), pages 1-19, August.

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