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International Tax Competition: Zero Tax Rate at the Top Re-established

  • Tomer Blumkin
  • Efraim Sadka
  • Yotam Shem-Tov
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    In this paper we extend the zero tax at the top result obtained in the closed economy case with bounded skill distributions for the case of unbounded skill distributions in the presence of international labor mobility and tax competition. We show that in the equilibrium for the tax competition game the optimal marginal income tax rate converges to zero as the income level tends to infinity. We further show in simulations that the zero marginal tax result is not a local property: over a large range at the higher end of the income distribution, the optimal tax is approximately given by a lump-sum tax set at its Laffer rate. We further show that the range in which the optimal marginal tax is approximately set to zero is widening as migration costs decrease.

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    File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2012/wp-cesifo-2012-05/cesifo1_wp3820.pdf
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    Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3820.

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    Date of creation: 2012
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    Handle: RePEc:ces:ceswps:_3820
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    1. Peter A. Diamond & Emmanuel Saez, 2011. "The Case for a Progressive Tax: From Basic Research to Policy Recommendations," CESifo Working Paper Series 3548, CESifo Group Munich.
    2. Tuomala, Matti, 1990. "Optimal Income Tax and Redistribution," OUP Catalogue, Oxford University Press, number 9780198286059, March.
    3. N. Gregory Mankiw & Matthew Weinzierl & Danny Yagan, 2009. "Optimal Taxation in Theory and Practice," NBER Working Papers 15071, National Bureau of Economic Research, Inc.
    4. Salanié, Bernard, 2011. "The Economics of Taxation," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262016346, June.
    5. Seade, J. K., 1977. "On the shape of optimal tax schedules," Journal of Public Economics, Elsevier, vol. 7(2), pages 203-235, April.
    6. Sadka, Efraim, 1976. "On Income Distribution, Incentive Effects and Optimal Income Taxation," Review of Economic Studies, Wiley Blackwell, vol. 43(2), pages 261-67, June.
    7. Gwenael Piaser, 2003. "Labor Mobility and Income Tax Competition," Public Economics 0302002, EconWPA.
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