Gains and Losses from Tax Competition with Migration

Seppo Mikko Sakari Honkapohja () and Turunen-Red, Arja

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

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.

Keywords: tax policy; mobility of labour; multiple equilibria; expectation traps (search for similar items in EconPapers)
JEL-codes: H87 F22 H21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-pbe
Date: 2004-02
Note: Ma, PE
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Working Paper: Gains and losses from tax competition with migration (2004)
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