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Shall we Keep the Highly Skilled at Home? The Optimal Income Tax Perspective

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  • Laurent Simula
  • Alain Trannoy

Abstract

We examine how allowing individuals to emigrate to pay lower taxes abroad changes the optimal non-linear income tax scheme in a Mirrleesian economy. An individual emigrates if his domestic utility is less than his utility abroad net of migration costs, utilities and costs both depending on productivity. Three average social criteria are distinguished – national, citizen and resident – according to the agents whose welfare matters. A curse of the middle-skilled occurs in the first-best, and it may be optimal to let some highly skilled leave the country under the resident criterion. In the second-best, under the Citizen and Resident criteria, preventing emigration of the highly skilled is not necessarily optimal because the interaction between the incentive-compatibility and participations constraints may cause countervailing incentives. In important cases, a Rawlsian policymaker should decrease top marginal tax rates to keep everyone at home.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3326.

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Date of creation: 2011
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Handle: RePEc:ces:ceswps:_3326

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Keywords: optimal income tax; top-income earners; migration; incentive constraints; participation constraints;

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References

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Cited by:
  1. Etienne Lehmann & Laurent Simula & alain trannoy, 2013. "Tax Me If You Can! Optimal Nonlinear Income Tax Between Competing Governments," Working Papers halshs-00870053, HAL.
  2. Craig Brett & John Weymark, 2008. "Strategic Nonlinear Income Tax Competition with Perfect Labor Mobility," Vanderbilt University Department of Economics Working Papers 0812, Vanderbilt University Department of Economics.
  3. Andrea ARIU & Pasquamaria SQUICCIARINI, 2013. "The Balance of Brains: Corruption and High Skilled Migration," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2013010, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).

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