Optimal tax and expenditure policy in the presence of emigration: Are credit restrictions important?

Purpose–This paper aims to present a theoretical underpinning for the fact that empirical studies have found an inverted-U curve relationship between emigration and per capita income, based on credit restrictions. The implications for tax policy are also analyzed. Design/methodology/approach–Using an intertemporal general equilibrium model, the authors characterize how the presence of an “inverted U-curve” relationship between emigration and per capita income will influence the optimal tax and expenditure policy in a country where agents have the option to move abroad. Findings–Among the results it is shown that if age-dependent taxes are available, the presence of an inverted-U curve provides an incentive to tax young labor harder, but old labor less hard, than otherwise. Originality/value–This migration model fits the empirical facts of migration better than most of the migration models previously used in the optimal taxation literature.