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26-09-2021 | Original Paper

Voting over selfishly optimal income tax schedules with tax-driven migrations

Journal:
Social Choice and Welfare
Authors:
Darong Dai, Guoqiang Tian
Important notes
This paper is a revised chapter of the Ph.D. thesis of Darong Dai submitted to Texas A&M University in May 2018. We are particularly indebted to John Weymark for his constructive comments and generous encouragement. Helpful comments and suggestions from an associate editor and a referee are gratefully acknowledged. We also would like to thank the helpful feedback and comments from Yonghong An, Pedro Bento, Laurent Bouton, Klaus Desmet, Simona Fabrizi, Andrew T. Foerster, Andrew Glover, Dennis W. Jansen, Claus Thustrup Kreiner, Quan Li, Jason Lindo, Liqun Liu, Chen-Yu Pan, Tatevik Sekhposyan, Sang-Chul Suh, Kei-Mu Yi, Yuzhe Zhang, Sarah Zubairy, and the participants of Macro Research Group and Macro Student Conference at TAMU (October 2017), the Midwest Economic Theory Conference at SMU (November 2017), the 14th Meeting of the Society for Social Choice and Welfare (June 2018), the 2018 and 2021 Asian Meetings of the Econometric Society, the 20th Annual Meeting of the Association for Public Economic Theory (July 2019), and the Joint Congress of the European Economic Association and the Econometric Society (August 2019). Financial support from the National Natural Science Foundation of China (NSFC-72003115) and the Key Laboratory of Mathematical Economics (SUFE) at Ministry of Education of China is gratefully acknowledged by Darong Dai. The usual disclaimer certainly applies.

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Abstract

We study majority voting over selfishly optimal nonlinear income tax schedules proposed by a continuum of workers who can migrate between two competing jurisdictions. Both skill level and migration cost are the private information of each worker who will propose an allocation schedule that maximizes the utility of her own type. We identify reasonable scenarios in which the first-order approach applies and hence the second-order sufficient condition for incentive compatibility is fulfilled; otherwise, we need to apply the ironing surgery developed by Brett and Weymark (Games Econ Behav 101:172–188, 2017). Under quasilinear-in-consumption preferences, we show that the tax schedule proposed by the median skill type is the Condorcet winner, and provide a complete characterization of this tax schedule. While this schedule features negative marginal tax rates for low-skilled workers, it features positive rates for high-skilled workers with small migration elasticities; the marginal tax rates at the bottom and top skill levels cannot be unambiguously signed. Moreover, we detail the conditions under which migration induces uniformly higher or lower equilibrium marginal tax rates facing both low- and high-skilled workers than their counterparts in autarky, which leads us to conclude that geographic mobility does not always limit the government’s ability to redistribute incomes via tax-transfer systems.

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