Nonlinear taxation and international mobility in general equilibrium

Abstract

Migration and general equilibrium forces are both known to limit the extent of redistribution due to a migration threat and a trickle-down rationale, respectively. In this paper, we consider these two forces jointly and study the optimal nonlinear taxation of internationally mobile workers in general equilibrium. We show that both forces partly offset each other. In general equilibrium, migration may lower the bottom tax rate but raises the top tax rate, challenging the classical migration-threat argument. Moreover, we demonstrate that migration responses weaken the trickle-down rationale. Both findings can be explained by a novel wage effect on migration and a migration effect on wages, calling for higher top tax rates to amplify pre-tax wage inequality and prevent high-skilled emigration. We calibrate our model to the U.S. economy and illustrate the new effects by comparing the optimal tax schemes with and without migration, as well as with and without endogeneity of wages.