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Tax Me If You Can! Optimal Nonlinear Income Tax Between Competing Governments

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  • Etienne Lehmann

    (TEPP - Travail, Emploi et Politiques Publiques - UPEM - Université Paris-Est Marne-la-Vallée - CNRS - Centre National de la Recherche Scientifique, CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - X - École polytechnique - IP Paris - Institut Polytechnique de Paris - ENSAE Paris - École Nationale de la Statistique et de l'Administration Économique - CNRS - Centre National de la Recherche Scientifique, ERMES - Equipe de recherche sur les marches, l'emploi et la simulation - UP2 - Université Panthéon-Assas - CNRS - Centre National de la Recherche Scientifique)

  • Laurent Simula

    (Uppsala Universitet [Uppsala])

  • Alain Trannoy

    (EHESS - École des hautes études en sciences sociales)

Abstract

We investigate how potential tax-driven migrations modify the Mirrlees income tax schedule when two countries play Nash. The social objective is the maximin and preferences are quasilinear in income. Individuals differ both in skills and migration costs, which are continuously distributed. We derive the optimal marginal income tax rates at the equilibrium, extending the Diamond-Saez formula. The theory and numerical simulations on the US case show that the level and the slope of the semi-elasticity of migration on which we lack empirical evidence are crucial to derive the shape of optimal marginal income tax. Our simulations show that potential migrations result in a welfare drop between 0.4% and 5.3% for the worst-off and an average gain between 18.9% and 29.3% for the top 1%.

Suggested Citation

  • Etienne Lehmann & Laurent Simula & Alain Trannoy, 2013. "Tax Me If You Can! Optimal Nonlinear Income Tax Between Competing Governments," Working Papers halshs-00870053, HAL.
    • Handle: RePEc:hal:wpaper:halshs-00870053
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00870053
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    More about this item

    Keywords

    Optimal Income Tax; Income Tax competition; Migration; Labor Mobility; NashEquilibrium Tax Schedules;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods

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