Abstract
The optimal income tax model under the threat of migration of Simula and Trannoy (J Public Econ 94:163–173, 2010; Soc Choice Welf 39(4):751–782, 2012) is extended to include indirect taxes and public goods. This enables us to conclude that: (1) optimal income tax rates are higher than in the absence of indirect taxation, and may be positive at the top of the skills distribution; (2) indirect taxes, à la Corlett and Hague, may help mitigate the loss of redistributive capacity arising from income taxation caused by migration threats; (3) migration encourages the provision of the public goods preferred by the most productive workers; (4) optimal tax and public goods provision policies against the emigration of the highly-skilled are connected through the conditions for Pareto efficiency; (5) if the number of potential migrators is large, it may be desirable to violate classical tax rules to retain the most able in the home country; (6) when migration costs are exogenously given and utility is weakly separable, Simula and Trannoy’s results are restored; (7) if migration costs are endogenous, the Atkinson and Stiglitz theorem breaks down and the taxation of country-specific goods becomes desirable, even if utility is strongly separable.
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14 September 2017
We regret that in the original publication of the article, some equations were incorrectly published. A number of typesetting errors, mainly spacing errors, have been fixed in the article to improve the readability.
Notes
There is a voluminous literature on income taxation and migration, but this does not address indirect taxation. For a complete review, see the introduction to Blumkin et al. (2011).
Although some readers may not be happy with this terminology given that distortionary taxation is present, we use here and elsewhere the term Pareto efficiency to express that the resulting conditions do not depend either on the social welfare function or on the distribution of abilities, as in the optimal taxation literature (see for instance Mirrlees 1976 or Atkinson and Stiglitz 1976).
Of course, this does not constrain the model because, since profit income is zero, the equilibrium does not change if all prices are multiplied by a positive constant. Consequently, one may always choose any good as numéraire and normalize the prices in such a way that we have an untaxed good.
This dispenses with the need for us to apply another small tax reform perturbation in the analysis below.
In Mirrlees’ optimal income tax problem, bunching turns out to be equivalent to a binding second-order constraint. However, this is no longer the case, as is well known, when there are more than two goods.
See, for instance, Pestel and Sommer (2013). The European Commission (2006) states: ‘One problematic aspect of the tax shift proposal is that, in practice, it is likely to have substantial redistributive effects. Taxpayers with high incomes would probably benefit substantially, while medium and low incomes might well face an increase in the tax burden’.
We have borrowed this concept from Jacobs and Boadway (2013, p. 22 ), although, to be more precise, they refer specifically to the ‘tax wedge on labour’.
We can also include within the concept of country-specific goods the so-called “ethnic goods”. A treatment on them from the angle of the host country is found in Abdulloev et al. (2014).
In the same spirit, Kessing and Koldert (2013) have shown that the A-S theorem is violated in the presence of cross-border shopping and exogenously given taxes on non-transportable goods.
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Acknowledgements
Financial support from the Ministerio de Economia y Competitividad (Project ECO2012-37572) and the Generalitat de Catalunya (Contract 2014SGR0327 and XREPP) is gratefully acknowledged.
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The original version of this article was revised: In the original publication of the article, some equations were incorrectly published. A number of typesetting errors, mainly spacing errors, have been fixed in the article to improve the readability.
A previous version of this paper has been circulated under the title ‘Optimal mixed taxation when agents may vote with their feet’. The author acknowledges comments made by the seminar participants at the 2014 LAGV conference (Aix en Provence) and at the 2015 IEB Workshop on Economics of Taxation (Barcelona), and would particularly like to mention Sebastian Kessing (University of Siegen) and Pierre Picard (University of Luxemburg). Comments from Igor Fedotenkov (Bank of Lithuania) were also appreciated.
An erratum to this article is available at https://doi.org/10.1007/s00712-017-0570-4.
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Ruiz del Portal, X. Optimal mixed taxation, public goods and the problem of high-skilled emigration. J Econ 122, 97–119 (2017). https://doi.org/10.1007/s00712-017-0536-6
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DOI: https://doi.org/10.1007/s00712-017-0536-6