Essays in Nonlinear Labor Income Taxation with Tax-Driven Migrations
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This dissertation includes two essays in nonlinear labor income taxation with tax-driven migrations. In the first essay, we study optimal nonlinear income taxation in an open economy with migration possibilities and social comparisons. Recent evidence suggests that globalization has not just reduced the barriers to international labor mobility but also induced more cross-country comparisons. In an open economy with tax-driven migrations and consumption externalities motivated by altruism or jealousy, we derive an optimal tax formula that subsumes existing ones obtained under maximin social objective and additively separable utility, and identify the sign of second-best marginal tax rates for all skill levels. We establish thresholds of the elasticity and level of migration to determine when relativity and inequality are complementary (or substitutive) in shaping the optimal top tax rates. These thresholds are in general different between altruism-type and jealousy-type relativity. Surprisingly, there exist reasonable combinations of relativity, mobility and inequality such that tax competition results in higher equilibrium top tax rates than proposed in autarky. Also, under both Nash and Stackelberg tax competition, we have the following numerical finding by plugging realistic parameter values in our tax formula. If the migration probability of top-income workers is around 50%, then the country facing labor inflow (respectively, outflow) of these types of workers implements around 10% lower (respectively, higher) top tax rates than suggested by the autarky equilibrium which does not allow for migration possibilities. In the second essay, we study majority voting over selfishly optimal nonlinear income tax schedules proposed by a continuum of workers who can migrate between two competing jurisdictions at the expense of some migration cost. Both skill and migration cost are the private information of each worker. Assuming quasilinear-in-consumption preferences, the tax schedule proposed by the median skill type is the Condorcet winner that redistributes incomes from the rich and poor toward the middle. While it features negative marginal tax rates for low skills, it features positive marginal tax rates for high skills who have elasticities of migration smaller than a threshold. In a comparison with the autarky economy, we establish the skill-dependent threshold of migration elasticity for all types of workers. If their migration elasticities are higher than their respective threshold, then migrations induce lower marginal tax rates than does autarky; otherwise migrations induce higher marginal tax rates for the jurisdiction facing net labor inflow in low skills while net labor outflow in high skills. Counterfactual simulations using empirical parameter estimates show that eliminating migrations in the U.S. would generate top tax rates over 20% higher than the 42.5% that was actually implemented.
Optimal income taxation
Nonlinear income tax
Dai, Darong (2018). Essays in Nonlinear Labor Income Taxation with Tax-Driven Migrations. Doctoral dissertation, Texas A & M University. Available electronically from