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-curverelationship between emigration and per capita income will inuence 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.
