Optimal non-linear income tax when highly skilled individuals vote with their feet, unpublished manuscript

This paper examines how allowing individuals to emigrate to pay lower taxes changes the op-timal non-linear income tax scheme in a Mirrleesian economy. Type-dependent participation constraints are borrowed from contract theory. An individual emigrates if his domestic utility is less than his utility abroad net of migration costs, utilities and costs both depending on pro-ductivity. Three social criteria are distinguished according to the agents whose welfare matters. Mobility signi\u85cantly alters the closed-economy results qualitatively, but also quantitatively as veri ed by simulations. A curse of the middle-skilled occurs in the \u85rst-best. In the second-best, the middle-skilled can support the highest average tax rates and the marginal tax rates can be negative. Moreover, preventing emigration of the highly-skilled is not necessarily optimal