IDEAS home Printed from https://ideas.repec.org/a/eee/jeborg/v172y2020icp57-82.html
   My bibliography  Save this article

Relativity, mobility, and optimal nonlinear income taxation in an open economy

Author

Listed:
  • Dai, Darong
  • Gao, Wenzheng
  • Tian, Guoqiang

Abstract

Recent evidence suggests that globalization has reduced the barriers to international labor mobility and induced more cross-country social comparisons. In an open economy with tax-driven migration and consumption externalities (relativity), we derive an optimal tax formula that subsumes existing ones obtained under a maximin social objective and additively separable utility and sign the second-best (Mirrleesian) marginal tax rates for all skill levels. We establish the thresholds of the elasticity and level of migration to determine when relativity and inequality act as complements or substitutes in shaping the optimal top tax rate. Under both Nash and Stackelberg tax competition if the migration probability of top-income workers is approximately 50%, numerical calculation using parameter estimates from empirical studies shows that the country with labor inflow (outflow) implements over 10% lower (higher) marginal tax rates than suggested by the autarky equilibrium of Kanbur and Tuomala (2013).

Suggested Citation

  • Dai, Darong & Gao, Wenzheng & Tian, Guoqiang, 2020. "Relativity, mobility, and optimal nonlinear income taxation in an open economy," Journal of Economic Behavior & Organization, Elsevier, vol. 172(C), pages 57-82.
  • Handle: RePEc:eee:jeborg:v:172:y:2020:i:c:p:57-82
    DOI: 10.1016/j.jebo.2020.02.009
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0167268120300470
    Download Restriction: Full text for ScienceDirect subscribers only

    File URL: https://libkey.io/10.1016/j.jebo.2020.02.009?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Francisco Alvarez-Cuadrado & Ngo Van Long, 2012. "Envy and Inequality," Scandinavian Journal of Economics, Wiley Blackwell, vol. 114(3), pages 949-973, September.
    2. Peter Diamond & Emmanuel Saez, 2011. "The Case for a Progressive Tax: From Basic Research to Policy Recommendations," Journal of Economic Perspectives, American Economic Association, vol. 25(4), pages 165-190, Fall.
    3. Boadway, Robin & Jacquet, Laurence, 2008. "Optimal marginal and average income taxation under maximin," Journal of Economic Theory, Elsevier, vol. 143(1), pages 425-441, November.
    4. Andrew E. Clark & Paul Frijters & Michael A. Shields, 2008. "Relative Income, Happiness, and Utility: An Explanation for the Easterlin Paradox and Other Puzzles," Journal of Economic Literature, American Economic Association, vol. 46(1), pages 95-144, March.
    5. Emmanuel Saez & Joel Slemrod & Seth H. Giertz, 2012. "The Elasticity of Taxable Income with Respect to Marginal Tax Rates: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 50(1), pages 3-50, March.
    6. AndrewE. Clark & Claudia Senik, 2010. "Who Compares to Whom? The Anatomy of Income Comparisons in Europe," Economic Journal, Royal Economic Society, vol. 120(544), pages 573-594, May.
    7. Bierbrauer, Felix & Brett, Craig & Weymark, John A., 2013. "Strategic nonlinear income tax competition with perfect labor mobility," Games and Economic Behavior, Elsevier, vol. 82(C), pages 292-311.
    8. Etienne Lehmann & Laurent Simula & Alain Trannoy, 2014. "Tax me if you can! Optimal Nonlinear Income Tax Between Competing Governments," The Quarterly Journal of Economics, Oxford University Press, vol. 129(4), pages 1995-2030.
    9. Thomas Piketty & Emmanuel Saez, 2012. "Optimal Labor Income Taxation," NBER Working Papers 18521, National Bureau of Economic Research, Inc.
    10. Becchetti, Leonardo & Castriota, Stefano & Corrado, Luisa & Ricca, Elena Giachin, 2013. "Beyond the Joneses: Inter-country income comparisons and happiness," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 45(C), pages 187-195.
    11. Thomas Piketty & Emmanuel Saez, 2013. "Optimal Taxation of Labor Income," PSE-Ecole d'économie de Paris (Postprint) halshs-00944881, HAL.
    12. Ireland, Norman J., 1998. "Status-seeking, income taxation and efficiency," Journal of Public Economics, Elsevier, vol. 70(1), pages 99-113, October.
    13. J. A. Mirrlees, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Oxford University Press, vol. 38(2), pages 175-208.
    14. Tomer Blumkin & Efraim Sadka & Yotam Shem-Tov, 2015. "International tax competition: zero tax rate at the top re-established," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 22(5), pages 760-776, October.
    15. Senik, Claudia, 2009. "Direct evidence on income comparisons and their welfare effects," Journal of Economic Behavior & Organization, Elsevier, vol. 72(1), pages 408-424, October.
    16. Jacquet, Laurence & Lehmann, Etienne & Van der Linden, Bruno, 2013. "Optimal redistributive taxation with both extensive and intensive responses," Journal of Economic Theory, Elsevier, vol. 148(5), pages 1770-1805.
    17. Simula, Laurent & Trannoy, Alain, 2010. "Optimal income tax under the threat of migration by top-income earners," Journal of Public Economics, Elsevier, vol. 94(1-2), pages 163-173, February.
    18. Ufuk Akcigit & Salomé Baslandze & Stefanie Stantcheva, 2016. "Taxation and the International Mobility of Inventors," American Economic Review, American Economic Association, vol. 106(10), pages 2930-2981, October.
    19. Mirrlees, J. A., 1982. "Migration and optimal income taxes," Journal of Public Economics, Elsevier, vol. 18(3), pages 319-341, August.
    20. Oswald, Andrew J., 1983. "Altruism, jealousy and the theory of optimal non-linear taxation," Journal of Public Economics, Elsevier, vol. 20(1), pages 77-87, February.
    21. Henrik Jacobsen Kleven & Camille Landais & Esben Schultz, 2014. "Migration and Wage Effects of Taxing Top Earners: Evidence from the Foreigners' Tax Scheme in Denmark," The Quarterly Journal of Economics, Oxford University Press, vol. 129(1), pages 333-378.
    22. Ravi Kanbur & Matti Tuomala, 2013. "Relativity, Inequality, And Optimal Nonlinear Income Taxation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 54, pages 1199-1217, November.
    23. Erzo F. P. Luttmer, 2005. "Neighbors as Negatives: Relative Earnings and Well-Being," The Quarterly Journal of Economics, Oxford University Press, vol. 120(3), pages 963-1002.
    24. Thomas Aronsson & Olof Johansson-Stenman, 2013. "Veblen’s theory of the leisure class revisited: implications for optimal income taxation," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 41(3), pages 551-578, September.
    25. Emmanuel Saez, 2001. "Using Elasticities to Derive Optimal Income Tax Rates," Review of Economic Studies, Oxford University Press, vol. 68(1), pages 205-229.
    26. Andrew B. Abel, 2005. "Optimal Taxation when Consumers Have Endogenous Benchmark Levels of Consumption," Review of Economic Studies, Oxford University Press, vol. 72(1), pages 21-42.
    27. Frank, Robert H., 2008. "Should public policy respond to positional externalities?," Journal of Public Economics, Elsevier, vol. 92(8-9), pages 1777-1786, August.
    28. Vilen Lipatov & Alfons Weichenrieder, 2015. "Welfare and labor supply implications of tax competition for mobile labor," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 45(2), pages 457-477, September.
    29. Laurent Simula & Alain Trannoy, 2012. "Shall we keep the highly skilled at home? The optimal income tax perspective," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 39(4), pages 751-782, October.
    30. Fong, Christina, 2001. "Social preferences, self-interest, and the demand for redistribution," Journal of Public Economics, Elsevier, vol. 82(2), pages 225-246, November.
    31. Joseph E. Stiglitz, 2018. "Rethinking Globalization in the Trump Era: US-China Relations," Frontiers of Economics in China, Higher Education Press, vol. 13(2), pages 133-146, June.
    32. Aronsson, Thomas & Johansson-Stenman, Olof, 2014. "Positional preferences in time and space: Optimal income taxation with dynamic social comparisons," Journal of Economic Behavior & Organization, Elsevier, vol. 101(C), pages 1-23.
    33. Henrik Jacobsen Kleven & Camille Landais & Emmanuel Saez, 2013. "Taxation and International Migration of Superstars: Evidence from the European Football Market," American Economic Review, American Economic Association, vol. 103(5), pages 1892-1924, August.
    34. Andersson, Fredrik W., 2008. "Is concern for relative consumption a function of relative consumption," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 37(1), pages 353-364, February.
    35. Alpizar, Francisco & Carlsson, Fredrik & Johansson-Stenman, Olof, 2005. "How much do we care about absolute versus relative income and consumption?," Journal of Economic Behavior & Organization, Elsevier, vol. 56(3), pages 405-421, March.
    36. Layard, Richard, 1980. "Human Satisfactions and Public Policy," Economic Journal, Royal Economic Society, vol. 90(363), pages 737-750, December.
    37. Diamond, Peter A, 1998. "Optimal Income Taxation: An Example with a U-Shaped Pattern of Optimal Marginal Tax Rates," American Economic Review, American Economic Association, vol. 88(1), pages 83-95, March.
    38. Aronsson, Thomas & Johansson-Stenman, Olof, 2015. "Keeping up with the Joneses, the Smiths and the Tanakas: On international tax coordination and social comparisons," Journal of Public Economics, Elsevier, vol. 131(C), pages 71-86.
    39. Gereffi, Gary & Luo, Xubei, 2014. "Risks and opportunities of participation in global value chains," Policy Research Working Paper Series 6847, The World Bank.
    40. Ireland, N. J., 2001. "Optimal income tax in the presence of status effects," Journal of Public Economics, Elsevier, vol. 81(2), pages 193-212, August.
    41. Joseph E. Stiglitz, 2019. "An Agenda for Reforming Economic Theory," Frontiers of Economics in China, Higher Education Press, vol. 14(2), pages 149-167, June.
    42. Mujcic, Redzo & Frijters, Paul, 2015. "Conspicuous consumption, conspicuous health, and optimal taxation," Journal of Economic Behavior & Organization, Elsevier, vol. 111(C), pages 59-70.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Darong Dai & Dennis W. Jansen & Liqun Liu, 2021. "Inter-jurisdiction migration and the fiscal policies of local governments," Journal of Economics, Springer, vol. 132(2), pages 133-164, March.
    2. Darong Dai, 2020. "Voting over selfishly optimal tax schedules: Can Pigouvian tax redistribute income?," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 22(5), pages 1660-1686, September.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Darong Dai, 2020. "Voting over selfishly optimal tax schedules: Can Pigouvian tax redistribute income?," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 22(5), pages 1660-1686, September.
    2. Aronsson, Thomas & Johansson-Stenman, Olof, 2015. "Keeping up with the Joneses, the Smiths and the Tanakas: On international tax coordination and social comparisons," Journal of Public Economics, Elsevier, vol. 131(C), pages 71-86.
    3. Etienne Lehmann & Laurent Simula & Alain Trannoy, 2014. "Tax me if you can! Optimal Nonlinear Income Tax Between Competing Governments," The Quarterly Journal of Economics, Oxford University Press, vol. 129(4), pages 1995-2030.
    4. Aronsson, Thomas & Ghosh, Sugata & Wendner, Ronald, 2020. "Positional Preferences and Efficiency in a Dynamic Economy," MPRA Paper 108333, University Library of Munich, Germany.
    5. Aronsson, Thomas & Johansson-Stenman, Olof, 2014. "Positional preferences in time and space: Optimal income taxation with dynamic social comparisons," Journal of Economic Behavior & Organization, Elsevier, vol. 101(C), pages 1-23.
    6. Donald Bruce & Langchuan Peng, 2018. "Optimal taxation in the presence of income-dependent relative income effects," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 51(2), pages 313-335, August.
    7. Thomas Aronsson & Olof Johansson-Stenman, 2014. "When Samuelson Met Veblen Abroad: National and Global Public Good Provision when Social Comparisons Matter," Economica, London School of Economics and Political Science, vol. 81(322), pages 224-243, April.
    8. Alejandro Esteller & Amedeo Piolatto & Matthew D. Rablen, 2016. "Taxing high-income earners: tax avoidance and mobility," IFS Working Papers W16/07, Institute for Fiscal Studies.
    9. Ravi Kanbur & Matti Tuomala, 2013. "Relativity, Inequality, And Optimal Nonlinear Income Taxation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 54(4), pages 1199-1217, November.
    10. Tomer Blumkin & Efraim Sadka & Yotam Shem-Tov, 2015. "International tax competition: zero tax rate at the top re-established," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 22(5), pages 760-776, October.
    11. Samano, Daniel, 2009. "Explaining Taxes at the Upper Tail of the Income Distribution: The Role of Utility Interdependence," MPRA Paper 19112, University Library of Munich, Germany.
    12. Aronsson, Thomas & Johansson-Stenman, Olof, 2014. "State-variable public goods and social comparisons," Journal of Environmental Economics and Management, Elsevier, vol. 68(2), pages 390-410.
    13. Bierbrauer Felix J., 2016. "Effizienz oder Gerechtigkeit?," Perspektiven der Wirtschaftspolitik, De Gruyter, vol. 17(1), pages 2-24, April.
    14. Aronsson, Thomas & Johansson-Stenman, Olof, 2014. "Paternalism against Veblen: Optimal Taxation and Non-Respected Preferences for Social Comparisons," Working Papers in Economics 606, University of Gothenburg, Department of Economics.
    15. Thomas Aronsson & Olof Johansson-Stenman, 2013. "Veblen’s theory of the leisure class revisited: implications for optimal income taxation," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 41(3), pages 551-578, September.
    16. Thomas Piketty & Emmanuel Saez, 2012. "Optimal Labor Income Taxation," NBER Working Papers 18521, National Bureau of Economic Research, Inc.
    17. Tóbiás, Áron, 2016. "Income redistribution in open economies," Journal of Public Economics, Elsevier, vol. 134(C), pages 19-34.
    18. Corazzini, Luca & Esposito, Lucio & Majorano, Francesca, 2012. "Reign in hell or serve in heaven? A cross-country journey into the relative vs absolute perceptions of wellbeing," Journal of Economic Behavior & Organization, Elsevier, vol. 81(3), pages 715-730.
    19. Felix Bierbrauer, 2016. "Effizienz oder Gerechtigkeit? Ungleiche Einkommen, ungleiche Vermögen und die Theorie der optimalen Besteuerung," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2016_03, Max Planck Institute for Research on Collective Goods.
    20. Thomas Aronsson & Olof Johansson‐Stenman & Tomas Sjögren, 2019. "Social Comparisons and Optimal Taxation in a Small Open Economy," Scandinavian Journal of Economics, Wiley Blackwell, vol. 121(4), pages 1500-1532, October.

    More about this item

    Keywords

    Relative consumption; International labor mobility; Maximin; Optimal income taxation; Nonlinear taxation; Tax competition;
    All these keywords.

    JEL classification:

    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • J61 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Geographic Labor Mobility; Immigrant Workers

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jeborg:v:172:y:2020:i:c:p:57-82. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: http://www.elsevier.com/locate/jebo .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jebo .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.