Migration and Wage Effects of Taxing Top Earners: Evidence from the Foreigners' Tax Scheme in Denmark
This paper 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 three main results. First, the scheme has doubled the number of highly paid foreigners in Denmark relative to slightly less paid ineligible foreigners, which translates into a very large elasticity of migration with respect to the net-of-tax rate on foreigners, between 1.5 and 2. Hence, preferential tax schemes for highly paid foreign workers could create severe tax competition between countries. Second, we find compelling evidence of a negative effect of scheme-induced increases in the net-of-tax rate on pre-tax earnings at the individual level. This finding cannot be explained by the standard labor supply model where pay equals marginal productivity, but it can be rationalized by a matching frictions model with wage bargaining where there is a gap between pay and marginal productivity. Third, we find no evidence of positive or negative spillovers of the scheme-induced influx of high-skilled foreigners on the earnings of highly paid natives.
We would like to thank Raj Chetty, Michael Devereux, Amy Finkelstein, Rick Hornbeck, Caroline Hoxby, Wojciech Kopczuk, Claus Kreiner, Ilyana Kuziemko, Bentley MacLeod, Alan Manning, James Poterba, and numerous seminar participants for helpful comments and discussions. Financial support from NSF Grant SES-1156240, the Center for Equitable Growth at UC Berkeley, and the European Tax Policy Forum is gratefully acknowledged. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Henrik Jacobsen Kleven & Camille Landais & Esben Schultz, 2013. "Migration and Wage Effects of Taxing Top Earners: Evidence from the Foreigners' Tax Scheme in Denmark," The Quarterly Journal of Economics, Oxford University Press, vol. 129(1), pages 333-378. citation courtesy of