Working Paper: NBER ID: w31920
Authors: Mathilde Muoz
Abstract: This paper quantifies the unequal welfare effects of tax competition. I derive the optimal tax and transfer schedules in a free mobility union composed of countries that can either compete or set a uniform federal tax rate. In the absence of fiscal coordination, governments internalize that any decentralized tax reform can lead to the out-migration of taxpayers at the top of the income distribution while increasing the in-migration of transfer recipients. As a result, the optimal level of redistribution is always lower in the tax competition equilibrium. Numerical calibrations show that being in a competition union rather than in a federal union decreases poorer individuals’ welfare by up to -20 percent. In contrast, the rich experience higher welfare in the tax competition equilibrium due to lower tax rates.
Keywords: No keywords provided
JEL Codes: H31; H73
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| tax competition (H26) | unequal welfare effects (I14) |
| tax competition (H26) | reduces redistribution (H23) |
| tax competition (H26) | disproportionately hurts the poor (I32) |
| increased tax rates (H29) | outmigration of higher-income taxpayers (F22) |
| outmigration of higher-income taxpayers (F22) | diminished tax base (H26) |
| diminished tax base (H26) | reduced public transfers to poorer individuals (H53) |
| tax competition (H26) | lower optimal tax rate (H21) |
| lower optimal tax rate (H21) | redistribution mechanism favors wealthier individuals (D30) |