Abstract
AbstractI study the effect of progressive taxation on internal migration and welfare using a quantitative dynamic model of geographic mobility. The model, which is analytically tractable, predicts that a more progressive tax‐transfer scheme reduces internal migration rates. The magnitude of this relationship is consistent with reduced‐form evidence for OECD countries. The internal migration channel contributes to significantly lower optimal tax progressivity relative to the one‐location version of the economy. The optimal sequence of tax progressivity along the transition features a relatively high degree of tax progressivity early on, followed by a declining path of tax progressivity over time.
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