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Migration and wage effects of taxing top earners: evidence from the foreigners' tax scheme in Denmark

Kleven, Henrik Jacobsen, Landais, Camille, Saez, Emmanuel and Schultz, Esben (2014) Migration and wage effects of taxing top earners: evidence from the foreigners' tax scheme in Denmark. Quarterly Journal of Economics, 129 (1). pp. 333-378. ISSN 0033-5533

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Identification Number: 10.1093/qje/qjt033

Abstract

This article analyzes the effects of income taxation on the international migration and earnings of top earners using a Danish preferential foreigner tax scheme and population-wide Danish administrative data. This scheme, introduced in 1991, allows new immigrants with high earnings to be taxed at a preferential flat rate for a duration of three years. We obtain two main results. First, the scheme has doubled the number of highly paid foreigners in Denmark relative to slightly less paid—and therefore ineligible—foreigners. This translates into a very large elasticity of migration with respect to 1 minus the average tax rate on foreigners, between 1.5 and 2. Second, we find compelling evidence of a negative effect of the scheme-induced reduction in the average tax rate on pretax earnings of foreign migrants at the individual level. This finding can be rationalized by a matching frictions model with wage bargaining where there is a gap between pay and marginal productivity.

Item Type: Article
Official URL: http://qje.oxfordjournals.org/
Additional Information: © The Author(s) 2013. Published by Oxford University Press, on behalf of President and Fellows of Harvard College
Divisions: Economics
Subjects: H Social Sciences > HC Economic History and Conditions
J Political Science > JN Political institutions (Europe)
J Political Science > JV Colonies and colonization. Emigration and immigration. International migration
JEL classification: H - Public Economics > H3 - Fiscal Policies and Behavior of Economic Agents > H31 - Household
J - Labor and Demographic Economics > J6 - Mobility, Unemployment, and Vacancies > J61 - Geographic Labor Mobility; Immigrant Workers
Sets: Departments > Economics
Date Deposited: 14 Feb 2014 11:27
Last Modified: 20 Apr 2019 01:09
Projects: SES-1156240
Funders: National Science Foundation, Centre for Equitable Growth at UC Berkeley, EPRN, European Tax Policy Forum
URI: http://eprints.lse.ac.uk/id/eprint/55688

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