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Optimal Income Tax under the Threat of Migration by Top-Income Earners

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  • Alain Trannoy, Laurent Simula and

    ()
    (Uppsala Center for Fiscal Studies)

Abstract

We examine how allowing individuals to emigrate to pay lower taxes changes the optimal nonlinear 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. A simple formula, that complements Saez’s formula obtained in closed economy, is derived for the marginal tax rates faced by top-income earners. It depends on the labour elasticity, the tax rate abroad and the migration costs expressed as a fraction of the utility obtained abroad. The Rawlsian marginal tax rates, obtained for the whole population, illustrate a curse of the middle-skilled. Simulations are provided for the French economy.

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Bibliographic Info

Paper provided by Uppsala University, Department of Economics in its series Working Paper Series, Center for Fiscal Studies with number 2009:8.

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Length: 26 pages
Date of creation: 12 Oct 2009
Date of revision:
Handle: RePEc:hhs:uufswp:2009_008

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Postal: Department of Economics, Uppsala University, P. O. Box 513, SE-751 20 Uppsala, Sweden
Phone: + 46 18 471 25 00
Fax: + 46 18 471 14 78
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Web page: http://www.nek.uu.se/
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Keywords: Optimal Income Taxation; Top income; Emigration; Participation Constraints;

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