Migration and Wage Effects of Taxing Top Earners: Evidence from the Foreigners' Tax Scheme in Denmark
AbstractThis paper analyzes the effects of income taxation on the international migration and earnings of top earners using a Danish preferential foreigner tax scheme and population-wide Danish administrative data. This scheme, introduced in 1991, allows new immigrants with high earnings to be taxed at a preferential flat rate for a duration of three years. We obtain three main results. First, the scheme has doubled the number of highly paid foreigners in Denmark relative to slightly less paid ineligible foreigners, which translates into a very large elasticity of migration with respect to the net-of-tax rate on foreigners, between 1.5 and 2. Hence, preferential tax schemes for highly paid foreign workers could create severe tax competition between countries. Second, we find compelling evidence of a negative effect of scheme-induced increases in the net-of-tax rate on pre-tax earnings at the individual level. This finding cannot be explained by the standard labor supply model where pay equals marginal productivity, but it can be rationalized by a matching frictions model with wage bargaining where there is a gap between pay and marginal productivity. Third, we find no evidence of positive or negative spillovers of the scheme-induced influx of high-skilled foreigners on the earnings of highly paid natives.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9410.
Date of creation: Mar 2013
Date of revision:
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Other versions of this item:
- Henrik Jacobsen Kleven & Camille Landais & Emmanuel Saez & Esben Anton Schultz, 2013. "Migration and Wage Effects of Taxing Top Earners: Evidence from the Foreigners' Tax Scheme in Denmark," NBER Working Papers 18885, National Bureau of Economic Research, Inc.
- H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
- H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
- J61 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Geographic Labor Mobility; Immigrant Workers
This paper has been announced in the following NEP Reports:
- NEP-ACC-2013-04-13 (Accounting & Auditing)
- NEP-ALL-2013-04-13 (All new papers)
- NEP-EUR-2013-04-13 (Microeconomic European Issues)
- NEP-LAB-2013-04-13 (Labour Economics)
- NEP-LMA-2013-04-13 (Labor Markets - Supply, Demand, & Wages)
- NEP-MIG-2013-04-13 (Economics of Human Migration)
- NEP-PBE-2013-04-13 (Public Economics)
- NEP-PUB-2013-04-13 (Public Finance)
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- Facundo Alvaredo & Anthony B. Atkinson & Thomas Piketty & Emmanuel Saez, 2013.
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