The project investigates optimal direct taxation under regional inequality. In regionally unequal countries the place of residence is systematically correlated with labor market productivity. Conditioning the tax-transfer-scheme on the region then provides an opportunity to increase the efficiency of the redistributive system. Migration endogenizes the place of residence, however, and regional tax-transfer-schemes may be set non-cooperatively. Building on the optimal regionally differentiated tax schedules, which were determined in the original project, the role of strategic interaction as well as the role of productivity and cost-of-living differences are investigated. The place of residence and the place of work must not necessarily coincide and the potential role of further tax instruments such as direct mobility subsidies or tax deductions is considered. Using model simulations the quantitative importance of key determinants are investigated and potential welfare gains from an expanded set of tax instruments are evaluated.
DFG Programme
Research Grants
