Working Paper: CEPR ID: DP18455
Authors: Jos Victor C Giarola; Olivier Marie; Frank Crvers; Hans Schmeets
Abstract: We investigate the mobility response of workers to a loss in preferential tax treatment, exploiting a radical policy change that shortened the duration of the tax break available to high-skilled migrants to the Netherlands. The policy change only affected migrants who arrived from specific countries within a certain period. Using tax and population-wide data and a difference-in-differences approach, we uncover the causal effect of tax-induced emigration and show that taking away tax breaks from migrants strongly increases their likelihood of leaving. Crucially, our findings show that this effect is entirely driven by out-migration from the top 1% of the income distribution. No migration response was detected for those below the 95th earnings percentile. Individuals in the top 1% of the income distribution decrease their length of stay by 11.1% and are 18.3% less likely to remain beyond the end of the five years that they receive the tax break, while ‘highly mobile’ individuals also react in terms of both intensive and extensive duration margins when among top 5% of earners. We estimate that the elasticity of migration with respect to the net-of-tax rate for the top 1% of earners is 1.48 to 1.74. Regarding the distortionary effect of national policies on international tax competition, we show that the most mobile tax earners become much more likely to leave for a tax-friendly country post reform, and we conclude that, at least in terms of the change in taxable receipts from labor in the Netherlands, this policy was cost neutral.
Keywords: tax-induced migration; high-skilled migrants; preferential tax treatment; outmigration; labor economics
JEL Codes: F22; H31; J61
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| removal of tax breaks for high-skilled migrants (F24) | likelihood of leaving the Netherlands (F22) |
| removal of tax breaks for high-skilled migrants (F24) | outmigration response among high-income earners (J61) |
| outmigration response among high-income earners (J61) | likelihood of leaving the Netherlands (F22) |
| removal of tax breaks for high-skilled migrants (F24) | migration response for individuals below the 95th earnings percentile (J69) |
| removal of tax breaks for high-skilled migrants (F24) | elasticity of migration concerning the net-of-tax rate for the top 1% of earners (H31) |