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Gains and losses from tax competition with migration

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  • Honkapohja, Seppo

    (University of Cambridge)

  • Turunen-Red, Arja H.

    (University of New Orleans)

Abstract

We consider international labor (entrepreneur) mobility in a two-country overlapping-generations model. Interactions of decreasing and increasing returns in production yield multiple equilibria that are stable under adaptive learning. Governments have an unilateral incentive to reduce income taxes at the joint optimum. We compare the Nash equilibrium in taxes under full labor mobility to the closed economy with no mobility. Despite strategic tax setting, the free mobility outcome is often better in welfare terms. Large, discrete gains in welfare may be attained because of the tax competition. Expectational barriers for discrete welfare improvements can be overcome through tax competition.

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Bibliographic Info

Paper provided by University of New Orleans, Department of Economics and Finance in its series Working Papers with number 2004-01.

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Length: 33 pages
Date of creation: 17 Feb 2004
Date of revision:
Handle: RePEc:uno:wpaper:2004-01

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Keywords: Tax policy; Mobility of labor; Multiple equilibria; Expectation traps;

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  1. Torsten Persson & Guido Tabellini, 1990. "The Politics of 1992: Fiscal Policy and European Integration," NBER Working Papers 3460, National Bureau of Economic Research, Inc.
  2. Devereux, Michael P & Lockwood, Ben & Redoano, Michela, 2002. "Do Countries Compete Over Corporate Tax Rates?," The Warwick Economics Research Paper Series (TWERPS) 642, University of Warwick, Department of Economics.
  3. Sinn, Hans-Werner, 2004. "The new systems competition," Munich Reprints in Economics 19608, University of Munich, Department of Economics.
  4. Wildasin, David E., 1999. "Factor mobility and fiscal policy in the EU: policy issues and analytical approaches," ZEW Discussion Papers 99-35, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  5. Wilson, John Douglas, 1999. "Theories of Tax Competition," National Tax Journal, National Tax Association, vol. 52(n. 2), pages 269-304, June.
  6. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66, pages 467.
  7. Honkapohja, Seppo & Turunen-Red, Arja, 1999. "Complementarity, Growth and Trade," CEPR Discussion Papers 2234, C.E.P.R. Discussion Papers.
  8. Sinn, Hans-Werner, 2002. "EU enlargement and the future of the welfare state," Munich Reprints in Economics 19736, University of Munich, Department of Economics.
  9. Richard Baldwin; Paul Krugman, 2001. "Agglomeration, Integration and Tax Harmonization," IHEID Working Papers 01-2001, Economics Section, The Graduate Institute of International Studies.
  10. Breyer, Friedrich & Kolmar, Martin, 2002. "Are national pension systems efficient if labor is (im)perfectly mobile?," Journal of Public Economics, Elsevier, vol. 83(3), pages 347-374, March.
  11. Jeremy Edwards & Michael Keen, 1994. "Tax competition and Leviathon," IFS Working Papers W94/07, Institute for Fiscal Studies.
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Cited by:
  1. Occhino Filippo, 2008. "Optimal Fiscal Policy When Migration Is Feasible," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 8(1), pages 1-19, August.

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