Efficient migration and redistribution

Abstract

It has often been noted that the brain drain may be abetted by highly progressive tax systems in the regions which are likely sources for emigration by those with the most income-earning potential. This paper presents the case in favour of such policies. The underlying assumption here is that there are productivity differences between regions, and that emigration of the most skilled workers from less productive regions increases the overall value of national output. The problem lies in sharing these gains with the less-skilled workers left behind in the low-productivity region. If national governments can transfer income among regions, but if the transfers cannot be targeted to particular individuals, then there is a trade-off between equity and efficiency. Generous transfers redistribute the gains, but tend to impede efficient migration, since prospective migrants will only emigrate if their earnings, net of all fiscal transfers, and net of migration costs, are higher in the destination region. Greater tax progressivity in the source region helps relax a constraint, and make the trade-off less difficult.