Scandinavian Working Papers in Economics

Working Paper Series, Center for Fiscal Studies,
Uppsala University, Department of Economics

No 2009:8: Optimal Income Tax under the Threat of Migration by Top-Income Earners

Laurent Simula and Alain Trannoy ()
Additional contact information
Laurent Simula and Alain Trannoy: Uppsala Center for Fiscal Studies, Postal: Department of Economics, Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden

Abstract: We examine how allowing individuals to emigrate to pay lower taxes changes the optimal nonlinear income tax scheme in a Mirrleesian economy. An individual emigrates if his domestic utility is less than his utility abroad, net of migration costs – utilities and costs both depending on productivity. A simple formula, that complements Saez’s formula obtained in closed economy, is derived for the marginal tax rates faced by top-income earners. It depends on the labour elasticity, the tax rate abroad and the migration costs expressed as a fraction of the utility obtained abroad. The Rawlsian marginal tax rates, obtained for the whole population, illustrate a curse of the middle-skilled. Simulations are provided for the French economy.

Keywords: Optimal Income Taxation; Top income; Emigration; Participation Constraints

JEL-codes: D82; F22; H21; H31

26 pages, October 12, 2009

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