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Strategic Nonlinear Income Tax Competition with Perfect Labor Mobility

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  • Felix Bierbrauer
  • Craig Brett
  • John A. Weymark

Abstract

Tax competition between two governments who choose nonlinear income tax schedules to maximize the average utility of its residents when skills are unobservable and labor is perfectly mobile is examined. We show that there are no Nash equilibria in which there is a skill type that pays positive taxes to one country and whose utility is larger than the average utility in the other country or in which the lowest skilled are subsidized. We also show that it is possible for the most highly skilled to receive a net transfer funded by taxes on lower skilled individuals in equilibrium. These findings confirm the race-to-the-bottom thesis in this setting.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3329.

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Date of creation: 2011
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Handle: RePEc:ces:ceswps:_3329

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Keywords: income tax competition; labor mobility; optimal income taxation; race to the bottom;

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References

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Citations

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Cited by:
  1. Vilen Lipatov & Alfons Weichenrieder, 2010. "Optimal Income Taxation with Tax Competition," CESifo Working Paper Series 3108, CESifo Group Munich.
  2. LEHMANN, Etienne & Simula, Laurent & TRANNOY, Alain, 2013. "Tax Me If You Can! Optimal Nonlinear Income Tax between Competing Governments," Working Paper Series, Center for Fiscal Studies 2013:8, Uppsala University, Department of Economics.
  3. Johannes Becker & Andrea Schneider, 2014. "Bidding for Firms with Unknown Characteristics," CESifo Working Paper Series 4806, CESifo Group Munich.
  4. Laurent Simula, 2013. "Tax Competition and Migration," 2013 Meeting Papers 1126, Society for Economic Dynamics.
  5. Massimo Morelli & Huanxing Yang & Lixin Ye, 2012. "Competitive Nonlinear Taxation and Constitutional Choice," American Economic Journal: Microeconomics, American Economic Association, vol. 4(1), pages 142-75, February.
  6. Laurent Simula & Alain Trannoy, 2012. "Shall we keep the highly skilled at home? The optimal income tax perspective," Social Choice and Welfare, Springer, vol. 39(4), pages 751-782, October.
  7. GABSZEWICZ, Jean & TAROLA, Ornella, 2011. "Migration, wage differentials and fiscal competition," CORE Discussion Papers 2011065, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  8. Tomer Blumkin & Efraim Sadka & Yotam Shem-Tov, 2011. "Labor Migration and the Case for Flat Tax," CESifo Working Paper Series 3471, CESifo Group Munich.

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