Strategic Nonlinear Income Tax Competition with Perfect Labor Mobility

32 Pages Posted: 7 Feb 2011

See all articles by Felix J. Bierbrauer

Felix J. Bierbrauer

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Research on Collective Goods

Craig Brett

Mount Allison University - Department of Mathematics and Computer Science

John A. Weymark

Vanderbilt University - College of Arts and Science - Department of Economics

Date Written: January 31, 2011

Abstract

Tax competition between two governments who choose nonlinear income tax schedules to maximize the average utility of its residents when skills are unobservable and labor is perfectly mobile is examined. We show that there are no Nash 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

JEL Classification: D82, H21, H87

Suggested Citation

Bierbrauer, Felix J. and Brett, Craig and Weymark, John A., Strategic Nonlinear Income Tax Competition with Perfect Labor Mobility (January 31, 2011). CESifo Working Paper Series No. 3329. Available at SSRN: https://ssrn.com/abstract=1756668

Felix J. Bierbrauer (Contact Author)

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Research on Collective Goods ( email )

Kurt-Schumacher-Str. 10
D-53113 Bonn, 53113
Germany

Craig Brett

Mount Allison University - Department of Mathematics and Computer Science ( email )

67 York Street
Sackville NB E4L 1E6
Canada

John A. Weymark

Vanderbilt University - College of Arts and Science - Department of Economics ( email )

Box 1819 Station B
Nashville, TN 37235
United States
1-615-322-1437 (Phone)
1-615-343-8495 (Fax)

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