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Fiscal and Migration Competition

  • Assaf Razin
  • Efraim Sadka

It is often argued that tax competition may lead to a ‘race to the bottom’. This result may indeed hold in the case of factor mobility (such as capital). However, in this paper we emphasize the unique feature of labor migration, that may nullify the’race to the bottom’ hypothesis. Labor migration is governed not only by net-of-tax factor rewards, but rather importantly also by the benefits that the welfare state provides. The paper analyzes fiscal competition with and without migration in a two-country, political-economy, model with labor of different skills. The paper assigns an active fiscal role for both the host and the source countries. It models the host country stylistically as a core EU welfare state, with tax financed benefits and migration policies, and the migration source country as an accession country (following the EU enlargement to 27 states), with its own welfare (tax-benefit) policy. We let these two asymmetric countries (in terms of their productivity) engage in fiscal competition. Using numerical simulations we examine how the migration and tax policies are shaped, and how they are affected by whether the skilled or the unskilled are in power. As the driving force behind migration is a productivity gap, we also analyze the implications of the productivity gap for the design of migration and tax policies.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2010/wp-cesifo-2010-06/cesifo1_wp3075.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3075.

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Date of creation: 2010
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Handle: RePEc:ces:ceswps:_3075
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  1. Razin, Assaf & Sadka, Efraim & Swagel, Phillip, 2002. "Tax burden and migration: a political economy theory and evidence," Journal of Public Economics, Elsevier, vol. 85(2), pages 167-190, August.
  2. Razin, Assaf & Sadka, Efraim & Swagel, Phill, 2001. "The Aging Population and the Size of the Welfare State," CEPR Discussion Papers 2930, C.E.P.R. Discussion Papers.
  3. Gordon H. Hanson & Kenneth F. Scheve & Matthew J. Slaughter, 2005. "Public Finance and Individual Preferences Over Globalization Strategies," Working Papers 524, Research Seminar in International Economics, University of Michigan.
  4. Gordon H. Hanson, 2008. "The Economic Consequences of the International Migration of Labor," NBER Working Papers 14490, National Bureau of Economic Research, Inc.
  5. Chari, V V & Kehoe, Patrick J, 1990. "International Coordination of Fiscal Policy in Limiting Economies," Journal of Political Economy, University of Chicago Press, vol. 98(3), pages 617-36, June.
  6. Anna Maria Mayda (Georgetown University), 2005. "Who Is Against Immigration? A Cross-Country Investigation of Individual Attitudes towards Immigrants," Working Papers gueconwpa~05-05-10, Georgetown University, Department of Economics.
  7. Jasso, Guillermina & Rosenzweig, Mark R., 2008. "Selection Criteria and the Skill Composition of Immigrants: A Comparative Analysis of Australian and U.S. Employment Immigration," IZA Discussion Papers 3564, Institute for the Study of Labor (IZA).
  8. Cohen, Alon & Razin, Assaf & Sadka, Efraim, 2009. "The Skill Composition of Migration and the Generosity of the Welfare State," CEPR Discussion Papers 7185, C.E.P.R. Discussion Papers.
  9. Barbone, Luca & Bontch-Osmolovsky, Misha & Zaidi, Salman, 2009. "The foreign-born population in the European Union and its contribution to national tax and benefit systems : some insights from recent household survey data," Policy Research Working Paper Series 4899, The World Bank.
  10. Christian Dustmann & Tommaso Frattini & Caroline Halls, 2010. "Assessing the Fiscal Costs and Benefits of A8 Migration to the UK," Fiscal Studies, Institute for Fiscal Studies, vol. 31(1), pages 1-41, 03.
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