Scandinavian Working Papers in Economics

Umeå Economic Studies,
Umeå University, Department of Economics

No 749: Optimal Tax and Expenditure Policy in the Presence of Migration - Are Credit Restrictions Important?

Kenneth Backlund (), Tomas Sjögren () and Jesper Stage ()
Additional contact information
Kenneth Backlund: Department of Economics, Umeå University, Postal: S 901 87 Umeå, Sweden
Tomas Sjögren: Department of Economics, Umeå University, Postal: S 901 87 Umeå, Sweden
Jesper Stage: Department of Social Sciences, Mid Sweden University, Postal: S 851 70 Sundsvall, Sweden

Abstract: This paper concerns optimal income taxation in the presence of emigration. The basic model is a two-period model where all agents are identical and live in the home country in the first period of life, but where some emigrate at the end of the first period. It is shown that with a binding credit restriction, the government will tax labor income in the first period at a higher rate than otherwise, whereas the labor income tax in the second period is unaffected by emigration. With heterogenous agents, the labor income tax in period two will be affected by emigration.

Keywords: optimal taxation; labor mobility; intertemporal consumer choice

JEL-codes: D91; H21; J61

34 pages, August 29, 2008

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