Optimal Non-Linear Income Tax when Highly Skilled Individuals Vote with their Feet
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 significantly alters the closed-economy results qualitatively, but also quantitatively as veri.ed 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.
|Date of creation:||Oct 2006|
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|Contact details of provider:|| Web page: http://www.econ.cam.ac.uk/index.htm|
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- 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.
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- 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.
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