Advertisement

International Tax and Public Finance

, Volume 22, Issue 5, pp 760–776 | Cite as

International tax competition: zero tax rate at the top re-established

  • Tomer Blumkin
  • Efraim SadkaEmail author
  • Yotam Shem-Tov
Article

Abstract

In this paper, we extend the zero tax at the top result obtained in the closed economy case with bounded skill distributions for the case of unbounded skill distributions in the presence of international labor mobility and tax competition. We show that in the equilibrium for the tax competition game, the optimal marginal income tax rate converges to zero as the income level tends to infinity. We further show in simulations that the zero-marginal tax result is not a local property: over a substantial range at the higher end of the income distribution, the optimal tax is approximately given by a lump-sum tax set at its Laffer rate. We further show that the range in which the optimal marginal tax is approximately set to zero is widening as migration costs decrease.

Keywords

Tax competition Migration Zero-marginal tax at the top 

JEL Classification

D6 H2 H5 

Supplementary material

10797_2014_9335_MOESM1_ESM.docx (1.5 mb)
ESM 1 (DOCX 1,579 kb)

References

  1. Atkinson, A. (1990). Public economics and the economic public. European Economic Review, 34, 225–248.CrossRefGoogle Scholar
  2. Bierbrauer, F., Brett, C., & Weymark, J. (2012). Strategic nonlinear income tax competition with perfect labor mobility. Mimeo, Department of Economics, Vanderbilt University.Google Scholar
  3. Dahan, M., & Strawczynski, M. (2000). Optimal income taxation: An example with a U-shaped pattern of optimal marginal tax rates: Comment. American Economic Review, 90, 681–686.CrossRefGoogle Scholar
  4. Diamond, P. (1998). Optimal income taxation: An example with a U-shaped pattern of optimal marginal tax rates. American Economic Review, 88, 83–95.Google Scholar
  5. Diamond, P., & Saez, E. (2011). The case for a progressive tax: From basic research to policy recommendations. Journal of Economic Perspectives, 25, 165–190.CrossRefGoogle Scholar
  6. Hamilton, J., & Pestieau, P. (2005). Optimal income taxation and the ability distribution: Implications for migration equilibria. International Tax and Public Finance, 12, 29–45.CrossRefGoogle Scholar
  7. Kleven, H., Landais, C., Saez, E., & Schultz, E. (2013) Migration and wage effects of taxing top earners: Evidence from the foreigners’ tax scheme in Denmark. Quarterly Journal of Economics(forthcoming).Google Scholar
  8. Krause, A. (2009). Education and taxation policies in the presence of countervailing incentives. Economica, 76, 387–399.CrossRefGoogle Scholar
  9. Lehmann, E., Simula, L., & Trannoy, A. (2013) Tax me if you can: Optimal non-linear income tax between competing governments. CesIfo working paper #4351.Google Scholar
  10. Mankiw, G., Weinzierl, M., & Yagan, D. (2009). Optimal taxation in theory and practice. Journal of Economic Perspectives, 23, 147–174.CrossRefGoogle Scholar
  11. Morelli, M., & Yang, H. (2012). Competitive nonlinear taxation and constitutional choice. American Economic Journal: Microeconomics, 4, 142–175.Google Scholar
  12. Mirrlees, J. (1971). An exploration in the theory of optimum income taxation. Review of Economic Studies, 38, 175–208.CrossRefGoogle Scholar
  13. Piaser, G. (2007). Labor mobility and income tax competition. In G. Gregoriou & C. Read (Eds.), International taxation handbook: Policy, practice, standards and regulation (pp. 73–94). Oxford: CIMA Publishing.Google Scholar
  14. Piketty, T., & Saez, E. (2012). Optimal labor income taxation. Handbook of Public Economics (forthcoming).Google Scholar
  15. Piketty, T., & Saez, E. (2013). A theory of optimal inheritance taxation. Econometrica, 81, 1851–1886.CrossRefGoogle Scholar
  16. Saez, E. (2001). Using elasticities to derive optimal income tax rates. Review of Economic Studies, 68, 205–229.CrossRefGoogle Scholar
  17. Saez, E. (2002). Optimal income transfer programs: Intensive versus extensive labor supply responses. Quarterly Journal of Economics, 117, 1039–1073.CrossRefGoogle Scholar
  18. Sadka, E. (1976). On income distribution, incentive effects and optimal income taxation. Review of Economic Studies, 43, 261–268.CrossRefGoogle Scholar
  19. Salanie, B. (2003). The economics of taxation. Cambridge: MIT Press.Google Scholar
  20. Seade, J. (1977). On the shape of optimal tax schedules. Journal of Public Economics, 7, 203–236.CrossRefGoogle Scholar
  21. Simula, L., & Trannoy, A. (2010). Optimal income tax under the threat of migration by top-earners. Journal of Public Economics, 94, 163–173.CrossRefGoogle Scholar
  22. Simula, L., & Trannoy, A. (2012). Shall we keep the highly skilled at home? The optimal income tax perspective. Social Choice and Welfare, 39, 751–782.CrossRefGoogle Scholar
  23. Tuomala, M. (1990). Optimal income tax and redistribution. New York: Oxford University Press.Google Scholar
  24. Wilson, J. (2006). Income taxation and skilled migration: The analytical issues. Mimeo, Department of Economics, Michigan State University.Google Scholar

Copyright information

© Springer Science+Business Media New York 2014

Authors and Affiliations

  • Tomer Blumkin
    • 1
    • 2
    • 3
  • Efraim Sadka
    • 2
    • 3
    • 4
    Email author
  • Yotam Shem-Tov
    • 5
  1. 1.Department of EconomicsBen-Gurion UniversityBeer-ShebaIsrael
  2. 2.CesIfoMunichGermany
  3. 3.IZABonnGermany
  4. 4.The Eitan Berglas School of EconomicsTel Aviv UniversityTel-AvivIsrael
  5. 5.Department of EconomicsUC BerkeleyBerkeleyUSA

Personalised recommendations