253/2015 Sebastian G. Kessing, Vilen Lipatov and J. Malte Zoubek

Combining an intensive labour supply margin with an extensive, productivity-enhancing migration margin, we determine how regional inequality and labor mobility shape optimal redistribution. We propose the use of delayed optimal-control techniques to obtain optimal tax formulae with location-dependent productivity and two-dimensional heterogeneity. Our baseline simulations using the productivity differences between large metropolitan and other regions in the US indicate that productivity-increasing internal migration can constitute a quantitatively important constraint on redistribution. Allowing for regionally differentiated taxation with location-dependent productivity, we find that marginal tax rates in high (low) productivity regions should be corrected downwards (upwards) relative to a no-migration benchmark.

Culture and Development

European Economic Review

https://doi.org/10.1016/j.euroecorev.2020.103439