Working Paper: CEPR ID: DP9600
Authors: Assaf Razin; Efraim Sadka
Abstract: We develop a stylized EU-type model of a union consisting of rich, capital-abundant and productive, countries, and poor,capital-scarce and low productivity, countries, in order to explain key features of tax policies and inter- and intra-migration flows. Our purpose is to explain the differences in the tax rates and the generosity of the welfare state, on the one hand, and migration flows, on the other hand, between rich and poor countries, within the union, and migration flows from the rest of the world. We identify a fiscal externality which makes the tax competition and the tax coordination regime to be different one from the other.
Keywords: capital mobility; fiscal leakage; labor mobility
JEL Codes: F2; H2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| tax competition (H26) | differing tax rates (H29) |
| differing tax rates (H29) | welfare state generosity (I38) |
| welfare state generosity (I38) | migration flows (F22) |
| tax competition (H26) | migration flows (F22) |
| differences in tax rates between rich and poor countries (H20) | varying migration flows (F22) |
| higher tax rates in rich countries (H29) | attract migrants (J61) |
| lower tax rates in poorer countries (H29) | net migration outflows (F22) |
| tax competition (H26) | higher overall tax rates in rich countries (H29) |
| fiscal externality (D62) | balancing gains and losses from migration (F22) |
| fiscal externality (D62) | higher overall tax rates compared to coordinated regime (H29) |