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Shall We Keep Highly Skilled at Home? The Optimal Income Tax Perspective

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  • Alain Trannoy, Laurent Simula and

    () (Uppsala Center for Fiscal Studies)

Abstract

We examine how allowing individuals to emigrate to pay lower taxes abroad changes the optimal non-linear 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. Three average social criteria are distinguished – national, citizen and resident – according to the agents whose welfare matters. A curse of the middle-skilled occurs in the first-best and it may be optimal to let some highly skilled leave the country under the resident criterion. In the second-best, we provide an extension of Saez’s formula for the optimal marginal tax rates. The middle-skilled can support the highest average tax rates and the marginal tax rates can be negative. Preventing emigration of the highly skilled is not necessarily optimal under the citizen and resident criteria.

Suggested Citation

  • Alain Trannoy, Laurent Simula and, 2009. "Shall We Keep Highly Skilled at Home? The Optimal Income Tax Perspective," Working Paper Series, Center for Fiscal Studies 2009:9, Uppsala University, Department of Economics.
  • Handle: RePEc:hhs:uufswp:2009_009
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    Cited by:

    1. Vilen Lipatov & Alfons J. Weichenrieder, 2010. "Optimal Income Taxation with Tax Competition," CESifo Working Paper Series 3108, CESifo Group Munich.
    2. Vilen Lipatov & Alfons Weichenrieder, 2015. "Welfare and labor supply implications of tax competition for mobile labor," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 45(2), pages 457-477, September.
    3. Simula, Laurent & Trannoy, Alain, 2010. "Optimal income tax under the threat of migration by top-income earners," Journal of Public Economics, Elsevier, vol. 94(1-2), pages 163-173, February.

    More about this item

    Keywords

    Optimal Income Tax; Emigration; Participation Constraints; Highly Skilled;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • F22 - International Economics - - International Factor Movements and International Business - - - International Migration
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household

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