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Strategic nonlinear income tax competition with perfect labor mobility |
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| Affiliation: | 1. Department of Economics, University of Copenhagen, Øster Farimagsgade 5, bygning 26 1353 København K, Denmark;2. California State University, Long Beach 1250 Bellflower Boulevard, Long Beach, California 90840, USA;3. Technical University of Denmark, Anker Engelunds Vej 1, Bygning 101A, 2800 Kgs. Lyngby, Denmark;1. University of Potsdam, Germany;2. CESifo, Germany;3. DIW Berlin, Germany;4. Freie Universität Berlin, Germany;5. IZA, Germany |
| Abstract: | Tax competition between two governments who choose nonlinear income tax schedules to maximize the average utility of their residents when skills are unobservable and labor is perfectly mobile is examined. We show that there are no equilibria in which there is a skill type that pays positive taxes to one country and whose utility is larger than the average utility in the other country or in which the lowest skilled are subsidized. We also show that it is possible for the most highly skilled to receive a net transfer funded by taxes on lower skilled individuals in equilibrium. These findings confirm the race-to-the-bottom thesis in this setting. |
| Keywords: | Income tax competition Labor mobility Optimal income taxation Race to the bottom |
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