ESSAYS IN MIGRATION AND TAXATION

Abstract

Exploration is in our nature. Throughout human history, migration has been vital to our survival, and continues to be central to our political discussions and economic fortunes. This dissertation contributes to an understanding of the effects of migration on welfare and taxation. In chapter 1, I examine the welfare effects of immigration on United States workers. I build a dynamic search and matching model in which immigrants and natives differ according to their outside options, separation rates, wealth holdings and skill composition. Immigration affects native-born welfare by i) altering the skill composition of the labor force, ii) lowering the expected hiring cost of firms, and iii) altering the rate of return on wealth. I demonstrate that the transition period, during which the economy adjusts to immigration, involves both higher returns to wealth and inferior labor market conditions in comparison to the long run steady state. Accounting for transition dynamics therefore shifts the welfare effects of immigration in favor of wealthy households at the expense of workers. In chapter 2, I shift the discussion from the movement of labor across national boundaries to the internal movement of labor from rural to urban locations. I analyze the welfare effects of a policy of modern sector enlargement (MSENL), and a policy of increasing the efficiency of on-the-job search from the urban informal sector (IEOS) in a generalized Harris-Todaro model. I show that MSENL causes a Lorenz worsening of the income distribution and IEOS causes a Lorenz improvement. In a rare direct application of the Atkinson theorem, I conclude that MSENL decreases social welfare and IEOS increases social welfare for all anonymous, increasing and Schur-concave social welfare functions. In chapter 3, I return to international migration by investigating its effect on the ability of governments to raise tax revenue. I construct Laffer curves using a static two country neoclassical model with international labor mobility. I show that international migration i) shifts the peak of the Laffer curve to the left, and ii) is quantitatively more important than the labor supply elasticity in determining the shape and position of the Laffer curve. Asimple calibration reveals that almost every country in the EU-14 is currently located on the “slippery slope” portion of both the labor tax and capital tax Laffer curves.In chapter 4, I depart from the theme of migration while retaining the focus on the tax system. Kyle Rozema and I analyze the effect of tax expenditures on the stabilizing power of the tax system. We propose a microsimulation strategy which exploits links that we identify between automatic stabilizers, tax expenditures, and effective marginal tax rates. Using the Survey of Consumer Finances from 1988 to 2009, we estimate that, on average, the Mortgage Interest Deduction and the Charitable Contributions Deduction increased the sensitivity of consumption to income fluctuations from a baseline of 0.14 by 1.13% and 0.97%, respectively.