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Mobility and redistribution: Challenges for tax systems

16th National Competition for Economic Research Grants

Public economics

Senior Researcher : Dirk Foremny

Research Centre or Institution : Universidad de Barcelona, Departamento de Economía y I.E.B.

Abstract

The aim of this project is a better understanding how mobility in a globalized world affects the ability of governments to intervene into the income distribution and redistribute income among citizens. This question is of utmost importance: Mobility costs, not only of capital, have decreased substantially. Labor markets became more integrated, and costs of moving have decreased. Consequently, economic agents move where they face better conditions. Firms where they produce at lower costs, and individuals where they pay less in taxes or receive higher benefits. This project focuses on the mobility of individuals. Recent research has shown that certain individuals are very sensitive with their location choice with respect to taxation. To be precise, certain rich individuals can move where they face lower taxes and to some extent, poor individuals where they face better working conditions or social benefits. This erodes the ability of governments to redistribute and has an important impact on inequality.

The project will answer three different questions. The first paper, published in 2019 in The Review of Economics and Statistics, investigates if high-income earner in Spain systematically reside in locations where their income-tax burden is lower. Taxes have a significant effect on location choice. A one percent increase in the net-of-tax rate for a region relative to others increases the probability of moving to that region by 1.7 percentage points. We estimate an elasticity of the number of top taxpayers with respect to net-of-tax rates of 0.85. The mechanical increase in tax revenue due to higher tax rates is larger than the loss in tax revenue from the net out-flow of migration.

The second paper Paraísos Fiscales, Wealth and Mobility focuses on owners of wealth and their response to wealth taxes. Given the recent policy debate, not only in the US, this topic is of high relevance. The recent reintroduction of the wealth tax in Spain resulted in regional governments exercising their powers to change wealth tax rates. Although most regions levied top tax rates of 2.5% to 3.75%, Madrid elected not to adopt a wealth tax. This provides a unique opportunity to study the mobility of taxable wealth. We find that regional wealth taxes substantially affect the location of taxable wealth. By four years following the decentralization, the share of wealth tax filers and the share of taxable wealth in Madrid increased by approximately 7%. We then turn to an individual location choice model and find that a one percentage point increase in the net-of-tax rate for a region increases the probability of relocating wealth to that region by 8 percentage points.

The third part of this project investigates how individuals at the lower end of the income distribution react to unemployment shocks and different opportunities across space. We document a general low propensity to move across provinces and Spain. This does not change once differences across regions increase. We explain this phenomenon by different fractions, such as housing cost differentials, which dampen migration.

 

Scientific Production
 
Magazine Articles 2
Communications at national conferences 1
Communications at international conferences 3

 

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