The dynamic effects of fiscal reforms and tax competition on tax compliance and migration

Abstract

AbstractWe study the dynamic effects of fiscal reforms on migration and tax evasion in an international context with two asymmetric countries. Given an initial international distribution of honest and dishonest taxpayers, the tax system (e.g., tax rates and degrees of progressivity) and the salary in each country, individuals decide where to reside and how much time to spend working. The model allows us to study in a dynamic setting how the distribution of honest and dishonest earners is geographically affected by fiscal reforms (e.g., variations in tax rates) and auditing efforts (e.g., probability of auditing and fines) of different countries. We show that various dynamic long term scenarios can be generated. The particular convergence of the model depends crucially on the initial geographic distribution of dishonest agents. This implies that tax reforms that have been successful in reducing tax evasion in one country may produce very different results in others, if initial conditions are significantly different. Chaotic cyclical behavior may also arise if individual propensity to migrate is sufficiently high.