Optimal income tax under the threat of migration by top-income earners |
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Authors: | Laurent Simula Alain Trannoy |
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Institution: | 1. Uppsala University and Uppsala Center for Fiscal Studies, Sweden;2. Ecole des Hautes Etudes en Sciences Sociales, France;3. Greqam-Idep, France |
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Abstract: | 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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