Migration, wages and fiscal competition

We analyze labor migration flows between two countries (regions) with different-sized populations and different levels of productive efficiencies to determine the effects of such flows on income taxation. The residents are heterogeneous because they incur different migration costs, although they are otherwise identical. Each resident compares her post-tax revenue at home with that obtained abroad, including migration costs, and each country’s government maximizes tax receipts. We study the existence of an equilibrium for any configuration of wages and for any difference in the relative sizes of the countries (regions). Then, we compute and characterize the equilibrium, whenever it exists, for any set of parameters, sizes and wage differentials. Finally, we show that equilibrium migration flows affect the level of income taxation in both the origin and destination countries.