How Much Are the Poor Losing From Tax Competition?

Mathilde Muñoz

No 31920, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper quantifies the unequal welfare effects of tax competition. I derive the optimal tax and transfer schedules in a free mobility union composed of countries that can either compete or set a uniform federal tax rate. In the absence of fiscal coordination, governments internalize that any decentralized tax reform can lead to the out-migration of taxpayers at the top of the income distribution while increasing the in-migration of transfer recipients. As a result, the optimal level of redistribution is always lower in the tax competition equilibrium. Numerical calibrations show that being in a competition union rather than in a federal union decreases poorer individuals’ welfare by up to -20 percent. In contrast, the rich experience higher welfare in the tax competition equilibrium due to lower tax rates.

JEL-codes: H31 H73 (search for similar items in EconPapers)
Date: 2023-11
New Economics Papers: this item is included in nep-mig, nep-pbe and nep-pub
Note: PE
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