Redistributive taxation and migration under uncertainty

Redistributive taxation under uncertainty has two functions: not only the redistribution of income across individuals who are ex ante different but also the sharing of risk between them. The economic integration of factor markets changes the distribution of income within each country, and so the redistributive policies must be changed to account for those changes. In this paper we show that, when mobile individuals are subject to a residence-based linear income tax, the optimal redistributive policy is dependent not only on the relative size of the economies but also on the timing of the migration process: under the small country hypothesis, there is no redistribution in equilibrium if workers’ migration decisions are taken with complete knowledge of incomes. If uncertainty is only solved after mobility has occurred, then it is possible to have redistributive taxation. In this latter case, the magnitude of the tax parameters depends on the size of the countries, i.e., on whether or not the home taxing authorities take foreign utilities as given.