Optimal Linear Income Tax when Agents Vote with their Feet

Laurent Simula and Alain Trannoy

FinanzArchiv: Public Finance Analysis, 2006, vol. 62, issue 3, 393-415

Abstract: Individuals, initially living in a Mirrleesian economy A, have outside options consisting in settling down in a laissez-faire country B while paying positive migration costs. We first examine the effect of the threat of migration, assuming participation constraints are taken into account for all individuals, and show that optimal linear income taxes are obtained as corner solutions. We then consider a social criterion allowing emigration of the highest-skilled individuals and show by means of an example that social welfare may rise following an increase in income redistribution, despite this resulting in the departure of the most productive individuals. Numerical simulations on French data illustrate the lack of degrees of freedom offered by linear taxation when agents can vote with their feet, which may be regarded as an argument against linear taxes.

Keywords: optimal linear income taxation; participation constraints; individual mobility (search for similar items in EconPapers)
JEL-codes: D82 F22 H21 H31 (search for similar items in EconPapers)
Date: 2006
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Citations: View citations in EconPapers (6)

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DOI: 10.1628/001522106X153446

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