Tax Me If You Can! Optimal Nonlinear Income Tax between Competing Governments

30 Pages Posted: 19 Oct 2013

See all articles by Etienne Lehmann

Etienne Lehmann

CREST; Catholic University of Louvain (UCL) - School of Economic and Social Research (IRES); IZA Institute of Labor Economics

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)

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Abstract

We investigate how potential tax-driven migrations modify the Mirrlees income tax schedule when two countries play Nash. The social objective is the maximin and preferences are quasilinear in income. Individuals differ both in skills and migration costs, which are continuously distributed. We derive the optimal marginal income tax rates at the equilibrium, extending the Diamond-Saez formula. The theory and numerical simulations on the US case show that the level and the slope of the semi-elasticity of migration on which we lack empirical evidence are crucial to derive the shape of optimal marginal income tax. Our simulations show that potential migrations result in a welfare drop between 0.4% and 5.3% for the worst-off and an average gain between 18.9% and 29.3% for the top 1%.

Keywords: optimal income tax, income tax competition, migration, labor mobility, Nash-equilibrium tax schedules

JEL Classification: D82, H21, H87

Suggested Citation

Lehmann, Etienne and Simula, Laurent and Trannoy, Alain, Tax Me If You Can! Optimal Nonlinear Income Tax between Competing Governments. IZA Discussion Paper No. 7646. Available at SSRN: https://ssrn.com/abstract=2342498

Catholic University of Louvain (UCL) - School of Economic and Social Research (IRES) ( email )

3, Place Montesquieu
1348 Louvain-la-Neuve
Belgium

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Laurent Simula

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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