Migration and Wage Effects of Taxing Top Earners: Evidence from the Foreigners' Tax Scheme in Denmark

53 Pages Posted: 15 Mar 2013

See all articles by Henrik Kleven

Henrik Kleven

London School of Economics & Political Science (LSE) - Suntory and Toyota International Centres for Economics and Related Disciplines (STICERD)

Camille Landais

London School of Economics & Political Science (LSE)

Emmanuel Saez

University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER)

Esben Anton Schultz

Kraka Foundation

Multiple version iconThere are 2 versions of this paper

Date Written: March 2013

Abstract

This paper analyzes the effects of income taxation on the international migration and earnings of top earners using a Danish preferential foreigner tax scheme and population-wide Danish administrative data. This scheme, introduced in 1991, allows new immigrants with high earnings to be taxed at a preferential flat rate for a duration of three years. We obtain three main results. First, the scheme has doubled the number of highly paid foreigners in Denmark relative to slightly less paid ineligible foreigners, which translates into a very large elasticity of migration with respect to the net-of-tax rate on foreigners, between 1.5 and 2. Hence, preferential tax schemes for highly paid foreign workers could create severe tax competition between countries. Second, we find compelling evidence of a negative effect of scheme-induced increases in the net-of-tax rate on pre-tax earnings at the individual level. This finding cannot be explained by the standard labor supply model where pay equals marginal productivity, but it can be rationalized by a matching frictions model with wage bargaining where there is a gap between pay and marginal productivity. Third, we find no evidence of positive or negative spillovers of the scheme-induced influx of high-skilled foreigners on the earnings of highly paid natives.

Suggested Citation

Kleven, Henrik and Landais, Camille and Saez, Emmanuel and Schultz, Esben Anton, Migration and Wage Effects of Taxing Top Earners: Evidence from the Foreigners' Tax Scheme in Denmark (March 2013). NBER Working Paper No. w18885. Available at SSRN: https://ssrn.com/abstract=2233777

Henrik Kleven (Contact Author)

London School of Economics & Political Science (LSE) - Suntory and Toyota International Centres for Economics and Related Disciplines (STICERD) ( email )

Houghton Street
London WC2A 2AE
United Kingdom

Camille Landais

London School of Economics & Political Science (LSE) ( email )

Emmanuel Saez

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States
510-642-4631 (Phone)
510-642-6615 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Esben Anton Schultz

Kraka Foundation ( email )

Kompagnistr├Žde 20A
Copenhagen
Denmark

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