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Gains and Losses from Tax Competition with Migration

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Publication Date: 2004-06-16

Publisher: Faculty of Economics

Language: en_GB

Type: Working Paper

Metadata: Show full item record

Citation: Honkapohja, S., & Turunen-Red, A. (2004). Gains and Losses from Tax Competition with Migration.

Abstract: We consider international labour (entrepreneur) mobility in a two-country overlapping-generations model. Interactions of decreasing and increasing returns in production yield multiple equilibria that are stable under adaptive learning. Governments have a unilateral incentive to reduce income taxes at the joint optimum. We compare the Nash equlibrium in taxes under full labour mobility to the closed economy with no mobility. Despite strategic tax setting, the free mobility outcome is often better in welfare terms. Large, discrete gains in welfare may be attained because of the tax competition. Expectational barriers for discrete welfare improvements can be overcome through tax competition.

Keywords: Classification-JEL: H87, F22, H21, tax policy, mobility of labour, multiple equilibria, expectation traps


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Autor: Honkapohja, SeppoTurunen-Red, Arja



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