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

37 Pages Posted: 8 Feb 2011

See all articles by Laurent Simula

Laurent Simula

Ecole des Hautes Etudes en Sciences Sociales (EHESS); Research Group in Quantitative Economics of Aix-Marseilles (GREQAM); Paris Jourdan Sciences Economiques

Alain Trannoy

National Center for Scientific Research (CNRS) - Ecole des Hautes Etudes en Sciences Sociales (EHESS)

Date Written: January 31, 2011

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, under the Citizen and Resident criteria, preventing emigration of the highly skilled is not necessarily optimal because the interaction between the incentive-compatibility and participations constraints may cause countervailing incentives. In important cases, a Rawlsian policymaker should decrease top marginal tax rates to keep everyone at home.

Keywords: optimal income tax, top-income earners, migration, incentive constraints, participation constraints

JEL Classification: H210, H310, D820, F220

Suggested Citation

Simula, Laurent and Trannoy, Alain, Shall We Keep the Highly Skilled at Home? The Optimal Income Tax Perspective (January 31, 2011). CESifo Working Paper Series No. 3326. Available at SSRN: https://ssrn.com/abstract=1756662

Laurent Simula (Contact Author)

Ecole des Hautes Etudes en Sciences Sociales (EHESS) ( email )

54, boulevard Raspail
Paris, 75006
France

HOME PAGE: http://www.ehess.fr

Research Group in Quantitative Economics of Aix-Marseilles (GREQAM) ( email )

Centre de la Vieille Charité
2, rue de la Charité
Marseille, 13002
France

Paris Jourdan Sciences Economiques ( email )

48, BD Jourdan
75014 Paris
France

Alain Trannoy

National Center for Scientific Research (CNRS) - Ecole des Hautes Etudes en Sciences Sociales (EHESS) ( email )

54, boulevard Raspail
Paris, 75006
France

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