Suchergebnisse

It is often argued that tax competition may lead to a 'race to the bottom'. This result may indeed hold in the case of factor mobility (such as capital). However, in this paper we emphasize the unique feature of labor migration, that may nullify the'race to the bottom' hypothesis. Labor migration is governed not only by net-of-tax factor rewards, but rather importantly also by the benefits that the welfare state provides. The paper analyzes fiscal competition with and without migration in a two-country, political-economy, model with labor of different skills. The paper assigns an active fiscal role for both the host and the source countries. It models the host country stylistically as a core EU welfare state, with tax financed benefits and migration policies, and the migration source country as an accession country (following the EU enlargement to 27 states), with its own welfare (tax-benefit) policy. We let these two asymmetric countries (in terms of their productivity) engage in fiscal competition. Using numerical simulations we examine how the migration and tax policies are shaped, and how they are affected by whether the skilled or the unskilled are in power. As the driving force behind migration is a productivity gap, we also analyze the implications of the productivity gap for the design of migration and tax policies.

The paper extends the welfare state model in an earlier paper [Razin, A., Sadka, E., Swagel, P., 2002. The aging population and the size of the welfare state. Journal of Political Economy 100, 900-918.] to include also a capital tax component in the income tax which pays the social security benefits. With a full-fledged income tax, various fiscal leakages are at play. This complicates the relationship between the size of the welfare state and aging that we analyze in a political-economy framework. The political economy equilibrium is governed by two voting pivots, one young and one old. Aging may turn the young pivot to a richer individual, who would prefer to downgrade the welfare state. But fiscal leakages can change the equilibrium relationship substantially. A fiscal leakage of revenues from the increased number of old taxpayers, of the capital tax component of the income tax to the young, may make the latter to vote for more taxes. But, on the other hand, a fiscal leakage from the young taxpayers, of the labor component of the income tax, to the increased number of old beneficiaries, may tame the appetite of the young for more taxes. As a result, the welfare system may not expand with the aging of the population. The paper also discusses the econometric problems in testing the predictions of models of this kind. OLS estimates of the coefficient of old dependency ratio are, in general, biased, because the analysis leaves out key variables associated with the identity of the median voter. The latter variables are presumed to be correlated with the error term. [Copyright 2006 Elsevier B.V.]