Faculty of Economics and Business Administration Publications Database

Welfare and labor supply implications of tax competition for mobile labor

Volume: 45
Number: 2
Pages: 457 - 477
Month: September
ISSN-Print: 0176-1714
Link External Source: Online Version
Year: 2015
Keywords: Welfare; Labor supply; Tax competition; Mobile labor

We introduce tax competition for mobile labor into an optimal-taxation model with two skill levels and analyze a subgame-perfect Nash equilibrium of the game between two governments and two taxpayer populations. Tax competition reduces the distortion from the informational asymmetry and increases labor supply of the less productive individuals. When one of the countries has a larger population, this effect is more pronounced in the smaller country. Tax competition generally tends to make societies more libertarian. Particular welfare effects for high and low skilled depend on the form of the government objective function.