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Optimal Non-Linear Income Tax when Highly Skilled Individuals Vote with their Feet

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Author Info
Laurent Simula () (EHESS)
Alain Trannoy () (EHESS, Greqam-Idep)

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Abstract

This paper examines how allowing individuals to emigrate to pay lower taxes changes the optimal non-linear income tax scheme in a Mirrleesian economy. Type-dependent participation constraints are borrowed from contract theory. 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 social criteria are distinguished according to the agents whose welfare matters. Mobility signi.cantly alters the closed-economy results qualitatively, but also quantitatively as verified by simulations. A curse of the middle-skilled occurs in the first-best. In the second-best, the middle-skilled can support the highest average tax rates and the marginal tax rates can be negative. Moreover, preventing emigration of the highly-skilled is not necessarily optimal.

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Publisher Info
Paper provided by Institut d'economie publique (IDEP), Marseille, France in its series IDEP Working Papers with number 0610.

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Length: 42 pages
Date of creation: 18 Dec 2006
Date of revision: 18 Dec 2006
Handle: RePEc:iep:wpidep:0610

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Related research
Keywords: Optimal Taxation; Income Tax; Emigration; Participation Constraints;

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Find related papers by JEL classification:
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
F22 - International Economics - - International Factor Movements and International Business - - - International Migration

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References listed on IDEAS
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  1. Brito, Dagobert L & Oakland, William H, 1977. "Some Properties of the Optimal Income-Tax," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 18(2), pages 407-23, June. [Downloadable!] (restricted)
  2. Borjas, George J., 1999. "The economic analysis of immigration," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 28, pages 1697-1760 Elsevier. [Downloadable!] (restricted)
  3. Laurent Simula & Alain Trannoy, 2006. "Optimal Linear Income Tax when Agents Vote with their Feet," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 62(3), pages 393-415, September. [Downloadable!] (restricted)
  4. Chander, Parkash & Wilde, Louis L, 1998. "A General Characterization of Optimal Income Tax Enforcement," Review of Economic Studies, Blackwell Publishing, vol. 65(1), pages 165-83, January. [Downloadable!] (restricted)
  5. Wilson, John D., 1982. "Optimal income taxation and migration : A world welfare point of view," Journal of Public Economics, Elsevier, vol. 18(3), pages 381-397, August. [Downloadable!] (restricted)
  6. Wilson, John D., 1982. "Optimal linear income taxation in the presence of emigration," Journal of Public Economics, Elsevier, vol. 18(3), pages 363-379, August. [Downloadable!] (restricted)
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