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Optimal Income Tax under the Threat of Migration by Top-Income Earners

  • Alain Trannoy, Laurent Simula and

    ()

    (Uppsala Center for Fiscal Studies)

We examine how allowing individuals to emigrate to pay lower taxes changes the optimal nonlinear income tax scheme in a Mirrleesian economy. An individual emigrates if his domestic utility is less than his utility abroad, net of migration costs – utilities and costs both depending on productivity. A simple formula, that complements Saez’s formula obtained in closed economy, is derived for the marginal tax rates faced by top-income earners. It depends on the labour elasticity, the tax rate abroad and the migration costs expressed as a fraction of the utility obtained abroad. The Rawlsian marginal tax rates, obtained for the whole population, illustrate a curse of the middle-skilled. Simulations are provided for the French economy.

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Paper provided by Uppsala University, Department of Economics in its series Working Paper Series, Center for Fiscal Studies with number 2009:8.

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Length: 26 pages
Date of creation: 12 Oct 2009
Date of revision:
Handle: RePEc:hhs:uufswp:2009_008
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Department of Economics, Uppsala University, P. O. Box 513, SE-751 20 Uppsala, Sweden

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Fax: + 46 18 471 14 78
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