MIGRATION into the WELFARE STATE: Tax and migration competition

Assaf Razin*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

Abstract

Despite big gains from easing restrictions on international labor mobility, liberalizing migration flows is not pursued unilaterally or negotiated among countries in a way that international trade negotiations are pursued. Among several key explanations is the fiscal burden imposed by immigration on native-born. The paper focuses on a central tension faced by policy makers in countries that receive migrants from lower wage countries. Such countries are typically high productivity and capital rich, and the resulting high wages attract both skilled and unskilled migrants. A generous welfare state may attract low-skill migration deter skilled migration, since it is likely to be accompanied by higher redistributive taxes. Assuming that a group of host countries faces an upward supply of immigrants, the analysis demonstrates that tax competition does not indeed lead to a race to the bottom; competition may lead to higher taxes than coordination. There exists a fiscal externality (fiscal leakage) that causes tax rates (on both labor and capital), and the volume of migration (of both skill types), to be higher in the competitive regime than in the coordinated regime.

Original languageEnglish
Pages (from-to)548-563
Number of pages16
JournalInternational Tax and Public Finance
Volume20
Issue number4
DOIs
StatePublished - Aug 2013

Keywords

  • Controlled migration
  • Generosity of the welfare state
  • Tax completion vs. tax coordination

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