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Fiscal and Migration Competition

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  • Assaf Razin
  • Efraim Sadka

Abstract

It is often argued that tax competition may lead to a ‘race to the bottom’. This result may indeed hold in the case of factor mobility (such as capital). However, in this paper we emphasize the unique feature of labor migration, that may nullify the’race to the bottom’ hypothesis. Labor migration is governed not only by net-of-tax factor rewards, but rather importantly also by the benefits that the welfare state provides. The paper analyzes fiscal competition with and without migration in a two-country, political-economy, model with labor of different skills. The paper assigns an active fiscal role for both the host and the source countries. It models the host country stylistically as a core EU welfare state, with tax financed benefits and migration policies, and the migration source country as an accession country (following the EU enlargement to 27 states), with its own welfare (tax-benefit) policy. We let these two asymmetric countries (in terms of their productivity) engage in fiscal competition. Using numerical simulations we examine how the migration and tax policies are shaped, and how they are affected by whether the skilled or the unskilled are in power. As the driving force behind migration is a productivity gap, we also analyze the implications of the productivity gap for the design of migration and tax policies.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2010/wp-cesifo-2010-06/cesifo1_wp3075.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3075.

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Date of creation: 2010
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Handle: RePEc:ces:ceswps:_3075

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References

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  1. Razin, A. & Sadka, E. & Swagel, P., 2000. "The Aging Population and the Size of the Welfare State," Papers, Tel Aviv 2000-23, Tel Aviv.
  2. V.V. Chari & Patrick J. Kehoe, 1989. "International coordination of fiscal policy in limiting economies," Staff Report, Federal Reserve Bank of Minneapolis 121, Federal Reserve Bank of Minneapolis.
  3. Alon Cohen & Assaf Razin & Efraim Sadka, 2009. "The Skill Composition of Migration and the Generosity of the Welfare State," NBER Working Papers 14738, National Bureau of Economic Research, Inc.
  4. Razin, Assaf & Sadka, Efraim & Swagel, Phillip, 2002. "Tax burden and migration: a political economy theory and evidence," Journal of Public Economics, Elsevier, Elsevier, vol. 85(2), pages 167-190, August.
  5. Christian Dustmann & Tommaso Frattini & Caroline Halls, 2009. "Assessing the Fiscal Costs and Benefits of A8 Migration to the UK," CReAM Discussion Paper Series, Centre for Research and Analysis of Migration (CReAM), Department of Economics, University College London 0918, Centre for Research and Analysis of Migration (CReAM), Department of Economics, University College London.
  6. Jasso, Guillermina & Rosenzweig, Mark R., 2008. "Selection Criteria and the Skill Composition of Immigrants: A Comparative Analysis of Australian and U.S. Employment Immigration," IZA Discussion Papers 3564, Institute for the Study of Labor (IZA).
  7. Gordon H. Hanson & Kenneth F. Scheve & Matthew Slaughter, 2005. "Public Finance and Individual Preferences over Globalization Strategies," NBER Working Papers 11028, National Bureau of Economic Research, Inc.
  8. Gordon H. Hanson, 2008. "The Economic Consequences of the International Migration of Labor," NBER Working Papers 14490, National Bureau of Economic Research, Inc.
  9. Anna Maria Mayda (Georgetown University), 2005. "Who Is Against Immigration? A Cross-Country Investigation of Individual Attitudes towards Immigrants," Working Papers, Georgetown University, Department of Economics gueconwpa~05-05-10, Georgetown University, Department of Economics.
  10. Barbone, Luca & Bontch-Osmolovsky, Misha & Zaidi, Salman, 2009. "The foreign-born population in the European Union and its contribution to national tax and benefit systems : some insights from recent household survey data," Policy Research Working Paper Series, The World Bank 4899, The World Bank.
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Cited by:
  1. Assaf Razin & Efraim Sadka, 2013. "Migration and Fiscal Competition within a Union," NBER Working Papers 19282, National Bureau of Economic Research, Inc.
  2. Fedotenkov, I., 2012. "Pensions and ageing in a globalizing world. International spillover effects via trade and factor mobility," Open Access publications from Tilburg University, Tilburg University urn:nbn:nl:ui:12-5590843, Tilburg University.
  3. Assaf Razin & Efraim Sadka, 2011. "Tax Competition and Migration: The Race-to-the-Bottom Hypothesis Revisited," NBER Working Papers 16670, National Bureau of Economic Research, Inc.

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