Abstract
The increasing international mobility of high-skill individuals is often seen as posing a threat to domestic social welfare, by limiting the ability of governments to tax these individuals and redistribute to the poor. In this paper, we examine a simple dynamic nonlinear income tax model without commitment. In this setting, it is shown that the threat of emigration by high-skill individuals facilitates redistribution and increases social welfare in the short-run, and has no effect on social welfare over the long-run.
Highlights
Optimal tax analyses typically assume that individuals cannot emigrate to avoid domestic taxation
When high-skill individuals are immobile, redistributive taxation must take into consideration that these individuals may change their labour supply along the intensive margin
When high-skill individuals are internationally mobile, they have the additional option of changing their labour supply along the extensive margin, i.e., they may emigrate
Summary
Optimal tax analyses typically assume that individuals cannot emigrate to avoid domestic taxation. We introduce the threat of emigration by high-skill individuals into a two-period nonlinear income tax model without commitment. The threat of emigration reduces the extent of redistribution possible in period 2, meaning that high-skill individuals require less compensation in period 1 to reveal their type. This enables the government to implement more redistribution in period 1, which correspondingly increases first-period social welfare. The threat of emigration limits redistribution and reduces social welfare in period 2, but optimal taxation balances the short-run benefits against the long-run costs.
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
