Part 1 - AL-Tax
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Part 1 - AL-Tax

Part 1 - AL-Tax Part 1 - AL-Tax

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Chapter 4We keep the same methodology. The first-order conditions give the bestreply of government B to the government A policy. We set U B1 U A1 and U B2 U A2 ,and we take arbitrary values for U B1 and U B2 . The first-order conditions become:αδ λδλ ⎡σ I B12 1 p1 p1IB1ν ⎛ ⎞ω⎤UB11 ⎝⎜1⎠⎟ 0,⎣⎢⎦⎥λ ⎡ ⎛ I B21δδλ1 2 p2p2IB2ν ⎜ ⎞ ⎤⎜⎜σUB22 ⎝ω2⎠⎟ 0,⎣⎢⎦⎥⎡ 1 ⎛ I B2δ1ν⎜ ⎞ ⎛ ⎞1 ⎤⎜⎜2 νI Bω2⎝ω2⎠⎟⎝⎜⎠⎟⎣⎢ω1ω ⎡ ⎛ ⎞ 1 I ⎤λpB 22 1 ν1 ⎥⎦⎝⎜⎠⎟ 0,⎣⎢ω2ω2⎦⎥⎡ 1 ⎛ I ⎞1 1 ⎛ I ⎞⎤⎡1δ2 ν BB ν1 ⎛I ⎞⎤ω1⎝⎜ω1⎠⎟ω2⎝⎜ω2⎠⎟λp B 11 1 ν ⎣⎢⎦⎥ω ⎝⎜1 ω1⎠⎟ 0.⎣⎢⎦⎥The budget constraint becomes:⎡p U⎣⎢1 B1⎛ I ⎞ ⎤ ⎡B1ν IB1 p 2 U⎝⎜ω 1⎠⎟⎦⎥⎣⎢B2⎛2ν I ⎞ ⎤BIB2 0.⎝⎜ω2⎠⎟⎦⎥The incentive constraints remain unchanged. We consider symmetric solutionsto the latter conditions. We keep the same notation.Again, tedious but straightforward computation shows that:● If σ 2 ∉ S, ɶ the equilibrium policy involves:⎛ p ⎞21 αpI2 I2 fb I1 I1 fb U2 I2 fb ⎝⎜1⎠⎟ σ , , p2p2σαp p σ11112Iν ⎛ ⎝⎜ω2 fb 2⎞and⎠⎟ ,U Ip1 1 fb 2 p1⎛ p ⎞21 α σ⎝⎜p1⎠⎟p2p2σαp p σ11112⎛ν I 1 fb ⎞⎝⎜ω1⎠⎟ .93

International Taxation HandbookIt implies that skilled workers pay an income tax Tunskilled workers receive a transferα p 1 /p 2 insures that T 2 is positive and T 1 is negative., and. The assumption● If σ 2 ∈ S ɶ and if country A adopts the policy described in the proof, the bestresponse of country B is to adopt the same policy. We can deduce that thep1 ασ 2p2p2σ1αp1p1σ2p11tax paid by the skilled workers is less than T .T1p2p12( )2p1ασ2p11p2p2σα1p1p1σ2( )( )p1 ασ 2p11p2p2σ1αp1p1σ294

International <strong>Tax</strong>ation HandbookIt implies that skilled workers pay an income tax Tunskilled workers receive a transferα p 1 /p 2 insures that T 2 is positive and T 1 is negative., and. The assumption● If σ 2 ∈ S ɶ and if country A adopts the policy described in the proof, the bestresponse of country B is to adopt the same policy. We can deduce that thep1 ασ 2p2p2σ1αp1p1σ2p11tax paid by the skilled workers is less than T .T1p2p12( )2p1ασ2p11p2p2σα1p1p1σ2( )( )p1 ασ 2p11p2p2σ1αp1p1σ294

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