Education Policy and Tax Competition with Imperfect Student and Labor Mobility (Revised Version, Feb. 2010)

Abstract

This paper analyzes the effect of increasing human-capital mobility -- i.e. student and labor mobility -- on net tax revenues when revenue-maximizing governments compete for human capital by means of income tax rates and amenities offered to students (positive expenditure) or rather tuition fees (negative expenditure). An increase in labor mobility implies neither an intensified tax competition nor an erosion of revenues. In fact, the equilibrium tax rate even increases in labor mobility. Amenities offered to students are non-monotonically related to labor mobility; overall, net revenues increase in labor mobility. An increase in student mobility, however, erodes revenues, mainly due to intensified tax competition. A concurrent cutback in expenditures mitigates this erosion but cannot fully prevent it.