Tax Incentives on Inter-Municipal Migration and Welfare

Abstract

Short-run effects of taxation on inter-municipal migration and welfare are examined in a modelconstructed as a synthesis of the classic model of inter-regional labour migration and the model ofinternational trade policy. It is found that there is an asymmetry in the effects of a given tax change. Labourincome taxation in an out-migration municipality induces emigration and causes welfare losses if the tax ishigh enough to surpass the migration threshold However, if the municipality is small and capital intensive inits industrial structure, the effects are still slight. Taxation in an in-migration municipality reverses themigration pattern and causes welfare losses even with a small tax, but the effects are modest if themunicipality is large and capital intensive. Thus, the effects may remain fairly insignificant in practice, atleast in Finland.