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Tax Me If You Can! Optimal Nonlinear Income Tax between Competing Governments

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  • Lehmann, Etienne

    ()
    (CRED, Université Panthéon Assas Paris 2)

  • Simula, Laurent

    ()
    (Uppsala University)

  • Trannoy, Alain

    ()
    (EHESS, Paris)

Abstract

We investigate how potential tax-driven migrations modify the Mirrlees income tax schedule when two countries play Nash. The social objective is the maximin and preferences are quasilinear in income. Individuals differ both in skills and migration costs, which are continuously distributed. We derive the optimal marginal income tax rates at the equilibrium, extending the Diamond-Saez formula. The theory and numerical simulations on the US case show that the level and the slope of the semi-elasticity of migration on which we lack empirical evidence are crucial to derive the shape of optimal marginal income tax. Our simulations show that potential migrations result in a welfare drop between 0.4% and 5.3% for the worst-off and an average gain between 18.9% and 29.3% for the top 1%.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 7646.

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Length: 30 pages
Date of creation: Sep 2013
Date of revision:
Publication status: Forthcoming in: Quarterly Journal of Economics
Handle: RePEc:iza:izadps:dp7646

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Keywords: optimal income tax; income tax competition; migration; labor mobility; Nash-equilibrium tax schedules;

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Cited by:
  1. Laurence JACQUET & Etienne LEHMANN, 2014. "Optimal Nonlinear Income Taxation with Multidimensional Types: The Case with Heterogeneous Behavioral Responses," THEMA Working Papers 2014-01, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.

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