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Migration into the Welfare State: Tax and Migration Competition

  • Assaf Razin

In this paper I provide some support to the Tiebout hypothesis. It suggests that when a group of host countries faces an upward supply of immigrants, tax competition does not indeed lead to a race to the bottom; competition may lead to higher taxes than coordination. We identify a fiscal externality (fiscal leakage) that causes tax rates (on both labor and capital), and the volume of migration (of both skill types), to be higher in the competitive regime than in the coordinated regime. If the population growth rate is positive the young are always in the majority. When raising period t payroll taxes the young voter has a tradeoff between the negative effect ( an income transfer to the old) and a general equilibrium income boosting effect on her private pension in period t+1 and the social security benefit in period t+1. Tax rate is positive if the (state variable) the capital stock is within a certain range, or zero, otherwise. Migration share of native born population is at the max if the state variable, the capital stock, is in the above mentioned range, or intermediate level, otherwise. In the case of private saving only regime, the migration share is intermediate level. Thus, migration shares in the social security-cum-private-savings regime are either the same, or is more liberal than in the private savings-only regime. A social security system effectively create an incentive, through the political-economy mechanism, for a country to bring in migrants.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2013/wp-cesifo-2013-05/cesifo1_wp4230.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 4230.

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Date of creation: 2013
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Handle: RePEc:ces:ceswps:_4230
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  1. Assaf Razin & Jackline Wahba, 2015. "Welfare Magnet Hypothesis, Fiscal Burden, and Immigration Skill Selectivity," Scandinavian Journal of Economics, Wiley Blackwell, vol. 117(2), pages 369-402, 04.
  2. Rosanne Altshuler & Timothy J. Goodspeed, 2002. "Follow the Leader? Evidence on European and U.S. Tax Competition," Departmental Working Papers 200226, Rutgers University, Department of Economics.
  3. McKinnish, Terra, 2007. "Welfare-induced migration at state borders: New evidence from micro-data," Journal of Public Economics, Elsevier, vol. 91(3-4), pages 437-450, April.
  4. Galasso, Vincenzo & Profeta, Paola, 2002. "The political economy of social security: a survey," European Journal of Political Economy, Elsevier, vol. 18(1), pages 1-29, March.
  5. Blank, Rebecca M., 1988. "The effect of welfare and wage levels on the location decisions of female-headed households," Journal of Urban Economics, Elsevier, vol. 24(2), pages 186-211, September.
  6. Assaf Razin & Efraim Sadka & Benjarong Suwankiri, 2009. "Migration and the welfare state: Dynamic Political-Economy Theory," NBER Working Papers 14784, National Bureau of Economic Research, Inc.
  7. Walmsley, Terri Louise & Winters, L. Alan, 2003. "Relaxing the Restrictions on the Temporary Movements of Natural Persons: A Simulation Analysis," CEPR Discussion Papers 3719, C.E.P.R. Discussion Papers.
  8. Casarico, Alessandra & Devillanova, Carlo, 2003. "Social security and migration with endogenous skill upgrading," Journal of Public Economics, Elsevier, vol. 87(3-4), pages 773-797, March.
  9. Assaf Razin & Efraim Sadka, 2004. "Welfare Migration: Is the Net Fiscal Burden a Good Measure of Its Economic Impact on the Welfare of the Native Born Population?," NBER Working Papers 10682, National Bureau of Economic Research, Inc.
  10. Hanushek, Eric A. & Wößmann, Ludger, 2012. "Do better schools lead to more growth? Cognitive skills, economic outcomes, and causation," Munich Reprints in Economics 20400, University of Munich, Department of Economics.
  11. Krieger, Tim, 2003. "Voting on Low-Skill Immigration under Different Pension Regimes," Public Choice, Springer, vol. 117(1-2), pages 51-78, October.
  12. De Giorgi, Giacomo & Pellizzari, Michele, 2009. "Welfare migration in Europe," Labour Economics, Elsevier, vol. 16(4), pages 353-363, August.
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  17. 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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  19. Mateos-Planas, Xavier, 2009. "Demographics and the politics of capital taxation in a life-cycle economy," Discussion Paper Series In Economics And Econometrics 0909, Economics Division, School of Social Sciences, University of Southampton.
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  29. repec:ebl:ecbull:v:6:y:2006:i:2:p:1-11 is not listed on IDEAS
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