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Social Choice and Welfare

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26.09.2021 | Original Paper

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

verfasst von: Darong Dai, Guoqiang Tian

Erschienen in: Social Choice and Welfare | Ausgabe 1-2/2023

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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.

Vorheriger Artikel Taxation behind the veil of ignorance

Nächster Artikel Bunching in rank-dependent optimal income tax schedules

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In a sense, the equity-efficiency tradeoff governing the design of a socially optimal tax-transfer system still applies to our study. On the one hand, the international mobility of high-skilled workers in the context of globalization makes the efficiency concern more relevant, while on the other hand the rising income inequality induced by globalization calls for more public transfers and subsidies to low-skilled workers (or the socially and economically disadvantaged) — especially when the majority rule under the one-person-one-vote principle is used to select tax schedules. In practice, both the United States (e.g., Piketty 2014) and China (e.g., Huang et al. 2020, 2021) face an intensifying equity-efficiency tradeoff—i.e., maintaining grassroots political support while guaranteeing economic efficiency.

Political factors are likely to considerably affect the structure of tax and transfer systems in Western democracies in the coming years. For instance, two manifestations are (1) the rise of extreme right parties in the EU in the backdrop of labor migrants and concerns about the implications for the sustainability of the welfare state and (2) the debate on the desirable marginal tax rates levied on top earners during the 2020 US presidential elections (e.g., the proposals of Democratic Party candidates such as Senators Bernie Sanders and Elizabeth Warren). Some trends favor the wealthy, perhaps due to political lobbying and the role of certain die-hard constituencies. Our theoretical paper must adopt a political economy model that is tractable to a certain degree; hence we leave some of these issues unexplored.

There are some exceptions, such as the US and Israel, where citizens pay domestic income tax based on their global income.

There are other conceptual frameworks for income redistribution under electoral competition besides the citizen-candidate model adopted here, such as the conventional Downsian model and its basic variants (e.g., vote-share maximizing politicians, a winner-take-all system, competition among politicians who differ in a quality dimension, policy-motivated candidates with commitment problems, and endogenous entry of politicians). That is, politicians propose optimal income tax schedules and then citizens (voters) choose among these proposals according to their preferences. By addressing distributive politics, our paper complements those analyses (e.g., Laslier and Picard 2002; Bierbrauer and Boyer 2013, 2016).

Nonetheless, as pointed out by a referee, one cannot exclude the possibility that other factors may determine individual preferences regarding redistribution, such as political affinity with left- or right-wing policies, beliefs and representations about social mobility, fairness concerns, and natives’ attitudes towards (and perceptions of) immigration, as shown, for example, empirically by Alesina et al. (2018) and Alesina et al. (2019).

In a population with the majority consisting of “poor” individuals, Höchtl et al. (2012) experimentally find that redistribution outcomes appear as if all voters were exclusively motivated by self-interest. We therefore argue that it is somewhat reasonable to focus on selfishly optimal income taxes in the current political economy.

This paper thus provides theoretical support to the empirical finding of Jacobs et al. (2017) that all Dutch political parties give greater political weight to middle incomes than to the poor and rich.

Given that income taxation in the United States is based on citizenship rather than the residence principle, the migration elasticities of high incomes may not be that large. This prediction helps explains why effective marginal tax rates in the United States are negative for low incomes and positive for high incomes (see Congressional Budget Office 2012).

Meltzer and Richard (1981) and Hindriks and De Donder (2003) have also studied voting over selfishly optimal tax schedules, but the former focuses on linear taxes and the latter on quadratic tax schedules.

Morelli et al. (2012) and Bierbrauer et al. (2013) employ a simpler assumption, that migration costs and skill levels are independently distributed. Assuming that migration costs distribute identically and independently across skill levels, Blumkin et al. (2015) also show that migration elasticity increases with respect to an individual’s skill level, which seems to be consistent with the empirical finding of Doquier and Marfouk (2006) and Simula and Trannoy (2010) that higher-skilled individuals are more likely to migrate.

This assumption not only simplifies the theoretical derivation; it also seems to be empirically reasonable by eliminating the income effect on taxable income (e.g., Gruber and Saez 2002). Under risk-neutral preferences, c could be interpreted as a nonnegative wealth transfer from the government (or the mechanism designer).

This principle states that there is an equivalence between admissible allocations and those that are decentralizable via an income tax system.

If individual skills are drawn independently, Bierbrauer (2011) proves that the optimal sophisticated mechanism associated with strategic interdependence is a simple mechanism as long as individuals exhibit decreasing risk aversion.

Throughout, the superscripts “R” and “M” stand for Rawlsian (i.e., maxi-min) and maxi-max, respectively.

We use the superscripts “\(M*\)” and “\(R*\)” to differentiate the complete solution from that obtained under the first-order approach.

For example, if a worker proposes a schedule that causes only some types to relocate to the other jurisdiction, then those types do not have the chance to vote on this proposal. Moreover, if the schedules proposed by two different individuals result in different sets of types being residents, then it is more difficult to determine which types should be allowed to vote.

In some developed countries, immigrants, especially newcomers, cannot participate in the political process; only fully fledged citizens can participate in collective decision-making. Many countries adopt a delayed instead assimilation policy, with a minimum residency period as a prerequisite for citizenship, e.g., 3 years (Netherlands, Australia, and Canada) to 10 years (Switzerland).

These conditions relate to the following four indexes: (1) whether the ex post measure of workers of all skill levels is greater than, equal to, or smaller than the ex ante one; (2) whether the net labor inflow of skill levels below the ex ante median skill level is positive or not; (3) whether the net labor inflow of skill levels above the ex ante median skill level is positive or not; and (4) the relative magnitude of these two net labor inflows.

We use the superscript “MR” because this threshold of migration elasticity is associated with the comparison of maxi-max (i.e., “M”) and Rawlsian (i.e., “R”) marginal tax rates.

In what follows, the superscripts “I”, “O”, and “NI” stand for inflow, outflow, and net inflow, respectively.

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Titel: Voting over selfishly optimal income tax schedules with tax-driven migrations
verfasst von: Darong Dai
Guoqiang Tian
Publikationsdatum: 26.09.2021
Verlag: Springer Berlin Heidelberg
Erschienen in: Social Choice and Welfare / Ausgabe 1-2/2023
Print ISSN: 0176-1714
Elektronische ISSN: 1432-217X
DOI: https://doi.org/10.1007/s00355-021-01366-3

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