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Gains and losses from tax competition with migration

Seppo Honkapohja () and Arja Turunen-Red
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Arja Turunen-Red: University of New Orleans

No 2004-01, Working Papers from University of New Orleans, Department of Economics and Finance

Abstract: We consider international labor (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 an unilateral incentive to reduce income taxes at the joint optimum. We compare the Nash equilibrium in taxes under full labor 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 labor; 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 and nep-ure
Date: 2004-02-17
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