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2014-08-31 | Peer Reviewed

Optimal tax and expenditure policy in the presence of migration – are credit restrictions important?

Backlund , Kenneth , Tomas Sjögren and Jesper Stage. 2014. “Optimal tax and expenditure policy in the presence of migration – are credit restrictions important? .” Indian Growth and Development Review 7:2: .
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Purpose: Empirical studies have found an inverted-U curve relationship between emigration and per capita income. In this paper, a theoretical underpinning for this phenomenon is presented based on credit restrictions. The implications for tax policy are also analyzed.

Design/methodology/approach: Using an intertemporal general equilibrium model, the authors characterize how the presence of an ’inverted U-curve’relationship between emigration and per capita income will in‡uence the optimal tax and expenditure policy in a country where agents have the option to move abroad.

Findings: Among the results it is shown that if age dependent taxes are available, the presence of an inverted-U curve provides an incentive to tax young labor harder, but old labor less hard, than otherwise.

Originality/value: Our migration model fits the empirical facts of migration better than most of the migration models previously used in the optimal taxation literature.