Migration and Wage Effects of Taxing Top Earners: Evidence from the Foreigners' Tax Scheme in Denmark

Henrik Jacobsen Kleven, Camille Landais and Esben Schultz

The Quarterly Journal of Economics, 2014, vol. 129, issue 1, 333-378

Abstract: This article analyzes the effects of income taxation on the international migration and earnings of top earners using a Danish preferential foreigner tax scheme and population-wide Danish administrative data. This scheme, introduced in 1991, allows new immigrants with high earnings to be taxed at a preferential flat rate for a duration of three years. We obtain two main results. First, the scheme has doubled the number of highly paid foreigners in Denmark relative to slightly less paid--and therefore ineligible--foreigners. This translates into a very large elasticity of migration with respect to 1 minus the average tax rate on foreigners, between 1.5 and 2. Second, we find compelling evidence of a negative effect of the scheme-induced reduction in the average tax rate on pretax earnings of foreign migrants at the individual level. This finding can be rationalized by a matching frictions model with wage bargaining where there is a gap between pay and marginal productivity. JEL Codes: H31, J61. Copyright 2014, Oxford University Press.

Date: 2014
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Working Paper: Migration and Wage Effects of Taxing Top Earners: Evidence from the Foreigners' Tax Scheme in Denmark (2013)
Working Paper: Migration and Wage Effects of Taxing Top Earners: Evidence from the Foreigners' Tax Scheme in Denmark (2013)
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