Optimal Non-Linear Income Tax when Highly Skilled Individuals Vote with their Feet
In this paper, individuals, initially living in a Mirrleesian economy A, have outside options consisting in settling down in a laissez-faire country B while paying positive migration costs. We first examine the impact of the threat of migration, assuming participation constraints are taken into account for all individuals, and show that optimal linear income taxes are obtained as corner solutions. We then consider a social criterion allowing emigration of the highest skilled individuals and show by means of an example that social welfare may rise following an increase in income redistribution, despite this resulting in the departure of the most productive individuals. Numerical simulations on French data illustrate the lack of degrees of freedom offered by linear taxation when agents can vote with their feet, which may be regarded as an argument against linear taxes.
|Date of creation:||Sep 2006|
|Date of revision:||Sep 2006|
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