Part 1 - AL-Tax

International Taxation HandbookThe conclusions from Proposition 3 allow us to demonstrate two properties.First, the neutrality of σ 1 no longer holds if we consider more general welfarefunctions. Second, the role of welfare criterion, which can imply counter-intuitiveand questionable behavior of governments.4.6 ConclusionIn this chapter it has been shown how mobility affects the possibility of redistribution,and the shape of the taxation policy has been defined. In this analysisthe key variable is the mobility of skilled workers, who are considered to be the‘victims’ of redistribution. If they can move, they use the competition between thetwo governments to reduce their income tax rate. On the other hand, the ability tomove of the unskilled workers does not affect the optimal tax policy of Rawlsiangovernments. 7 Moreover, if the cost to move for the skilled workers is small, theequilibrium of the game leads to first best allocations, i.e. efficient labor supplies.This does not mean that fiscal competition has no effect on the redistribution. Onthe contrary, redistribution is reduced by this competition. Finally, the role of thewelfare function has been stressed using one particular example: If the governmentcares about the whole population, the tax system exhibits ‘counter-intuitivebehavior’. Despite being benevolent definition, the government induces the lessrich part of the population to migrate to other countries.From a technical point of view, even if we use a standard model, some assumptionsare restrictive in different ways. The welfare function plays a central role inour model. As has been said, these results have been derived using two particularwelfare functions. Introducing generalized welfare functions would give intuitionon the robustness of the main conclusions of this chapter. Also, a tractablediscrete-type model has been considered, but even in a more traditional settingdiscrete and continuous models are not strictly equivalent.The existence of nonsymmetric equilibria remains an open question. As long aswe consider symmetric countries, focusing on symmetric equilibria makes sense.But a clear possible extension would be to take asymmetric countries into account,and then we would have no reason to focus on these particular outcomes of thegame. As capital taxation is an important question in economic literature, introducinga generalized production function including capital as production factorand capital taxation (as in Huber, 1999) would also probably give new results.Finally, the importance of mobility costs of the skilled workers has beenstressed. It would be interesting to try to get empirical estimations for these costs.88