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Optimal Linear Income Tax when Agents Vote with their Feet

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  • Laurent Simula
  • Alain Trannoy

Abstract

Individuals, initially living in a Mirrleesian economy A, have outside options consisting in settling down in a laissez-faire country B while paying positive migration costs. We first examine the effect of the threat of migration, assuming participation constraints are taken into account for all individuals, and show that optimal linear income taxes are obtained as corner solutions. We then consider a social criterion allowing emigration of the highest-skilled individuals and show by means of an example that social welfare may rise following an increase in income redistribution, despite this resulting in the departure of the most productive individuals. Numerical simulations on French data illustrate the lack of degrees of freedom offered by linear taxation when agents can vote with their feet, which may be regarded as an argument against linear taxes.

Suggested Citation

  • 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.
  • Handle: RePEc:mhr:finarc:urn:sici:0015-2218(200609)62:3_393:olitwa_2.0.tx_2-l
    DOI: 10.1628/001522106X153446
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    References listed on IDEAS

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    1. Parkash Chander, 1998. "A Stronger Measure of Risk Aversion and a General Characterization of Optimal Income Tax Enforcement," Economics Working Paper Archive 399, The Johns Hopkins University,Department of Economics.
    2. Laslier, Jean-Francois & Trannoy, Alain & Van Der Straeten, Karine, 2003. "Voting under ignorance of job skills of unemployed: the overtaxation bias," Journal of Public Economics, Elsevier, vol. 87(3-4), pages 595-626, March.
    3. Dixit, Avinash K & Sandmo, Angar, 1977. " Some Simplified Formulae for Optimal Income Taxation," Scandinavian Journal of Economics, Wiley Blackwell, vol. 79(4), pages 417-423.
    4. Eytan Sheshinski, 1972. "The Optimal Linear Income-tax," Review of Economic Studies, Oxford University Press, vol. 39(3), pages 297-302.
    5. 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.
    6. Helpman, Elhanan & Sadka, Efraim, 1978. "The optimal income tax : Some comparative statics results," Journal of Public Economics, Elsevier, vol. 9(3), pages 383-393, June.
    7. Mirrlees, J. A., 1982. "Migration and optimal income taxes," Journal of Public Economics, Elsevier, vol. 18(3), pages 319-341, August.
    8. Parkash Chander & Louis L. Wilde, 1998. "A General Characterization of Optimal Income Tax Enforcement," Review of Economic Studies, Oxford University Press, vol. 65(1), pages 165-183.
    9. Romer, T, 1976. "On the Progressivity of the Utilitarian Income Tax," Public Finance = Finances publiques, , vol. 31(3), pages 414-426.
    10. Hellwig, Martin F., 1986. "The optimal linear income tax revisited," Journal of Public Economics, Elsevier, vol. 31(2), pages 163-179, November.
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    Citations

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    Cited by:

    1. Kenneth Backlund & Tomas Sjögren & Jesper Stage, 2014. "Optimal tax and expenditure policy in the presence of emigration: Are credit restrictions important?," Indian Growth and Development Review, Emerald Group Publishing, vol. 7(2), pages 98-117, November.
    2. Simula, L. & Trannoy, A., 2006. "Optimal Non-Linear Income Tax when Highly Skilled Individuals Vote with their Feet," Cambridge Working Papers in Economics 0656, Faculty of Economics, University of Cambridge.
    3. Olivier Bargain & Mathias Dolls & Dirk Neumann & Andreas Peichl & Sebastian Siegloch, 2011. "Tax-Benefit Systems in Europe and the US: Between Equity and Efficiency," CESifo Working Paper Series 3534, CESifo Group Munich.
    4. 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.
    5. 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.

    More about this item

    Keywords

    optimal linear income taxation; participation constraints; individual mobility;

    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; Mechanism Design
    • F22 - International Economics - - International Factor Movements and International Business - - - International Migration

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