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Gains and Losses from Tax Competition with Migration

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  • Honkapohja ,S.
  • Turunen-Red, A.

Abstract

We consider international labour (entrepreneur) mobility in a two-country overlapping-generations model. Interactions of decreasing and increasing returns in production yield multiple equilibria that are stable under adaptive learning. Governments have a unilateral incentive to reduce income taxes at the joint optimum. We compare the Nash equlibrium in taxes under full labour mobility to the closed economy with no mobility. Despite strategic tax setting, the free mobility outcome is often better in welfare terms. Large, discrete gains in welfare may be attained because of the tax competition. Expectational barriers for discrete welfare improvements can be overcome through tax competition.

Suggested Citation

  • Honkapohja ,S. & Turunen-Red, A., 2004. "Gains and Losses from Tax Competition with Migration," Cambridge Working Papers in Economics 0416, Faculty of Economics, University of Cambridge.
    • Handle: RePEc:cam:camdae:0416
    Note: Ma, PE
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    Cited by:

    1. Occhino Filippo, 2008. "Optimal Fiscal Policy When Migration Is Feasible," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 8(1), pages 1-19, August.

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    More about this item

    Keywords

    tax policy; mobility of labour; multiple equilibria; expectation traps;
    All these keywords.

    JEL classification:

    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods
    • F22 - International Economics - - International Factor Movements and International Business - - - International Migration
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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