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Optimal Fiscal Policy When Migration is Feasible

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  • Filippo Occhino

    (Rutgers University)

Abstract

This paper investigates how the feasibility of migration affects governments' optimal fiscal policies. We assume that households migrate towards economies where their welfare is higher, governments choose taxes and public expenditures to maximize a weighted sum of the households' welfare, welfare is increasing in public expenditures, and only distortionary labor income taxes are available. In isolated economies, the optimal fiscal policy implies that some households are net fiscal contributors, while other households are net fiscal beneficiaries. When households can migrate, however, governments compete for the households which are net fiscal contributors, and modify the fiscal policy in their favor, lowering their taxes and net fiscal contribution, and increasing their welfare. The magnitude of the effect increases with the sensitivity of migration to welfare. In the limiting case of free mobility, all households are zero net fiscal contributors.

Suggested Citation

  • Filippo Occhino, 2005. "Optimal Fiscal Policy When Migration is Feasible," Departmental Working Papers 200507, Rutgers University, Department of Economics.
  • Handle: RePEc:rut:rutres:200507
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    References listed on IDEAS

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    1. Razin,Assaf & Sadka,Efraim, 2001. "Labor, Capital, and Finance," Cambridge Books, Cambridge University Press, number 9780521785570, November.
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    5. Kjetil Storesletten, 2000. "Sustaining Fiscal Policy through Immigration," Journal of Political Economy, University of Chicago Press, vol. 108(2), pages 300-323, April.
    6. Razin, Assaf & Sadka, Efraim & Swagel, Phillip, 2002. "Tax burden and migration: a political economy theory and evidence," Journal of Public Economics, Elsevier, vol. 85(2), pages 167-190, August.
    7. Honkapohja ,S. & Turunen-Red, A., 2004. "Gains and Losses from Tax Competition with Migration," Cambridge Working Papers in Economics 0416, Faculty of Economics, University of Cambridge.
    8. Lucas, Robert Jr. & Stokey, Nancy L., 1983. "Optimal fiscal and monetary policy in an economy without capital," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 55-93.
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    Cited by:

    1. Valeria Bonis & Luca Spataro, 2018. "Optimal income taxation and migration," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 25(4), pages 867-882, August.

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    More about this item

    Keywords

    Optimal fiscal policy; Ramsey equilibrium; Migration; Fiscal competition; Mobility;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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