Distortionary Taxation, Debt, and Immigration

In this paper we investigate the behavior of an overlapping dynasties growth model with factor taxation to determine how much the natives of a country absorbing a flow of immigrants can use shifts in factor taxation or deficit finance to redistribute immigrant income to themselves. In an economy in which government expenditure is a fixed share of net national product, policy-makers can minimize the deadweight loss from factor taxation by equalizing the long-run tax rates on capital and work. However when the native population of a country expect immigrants to arrive in the future they can choose to shift some of the tax burden away from their own sources of income and on to the income of future immigrants without explicitly imposing discriminatory taxes. Instead, because natives are capital owners but immigrants are not they may choose to shift the burden of taxation from capital to labor. Alternatively, by temporarily lowering taxes they can shift the burden of present day government consumption to immigrants that have not yet arrived. Our results suggest that because of the steep dead weight loss incurred when factor taxes deviate from equality the scope for redistribution through intratemporal shifts from capital to labor is very small–the optimal tax on capital drops by approximately a percentage point for each percent inflow of immigrants. Much greater benefits are achieved by shifting taxes across time. JEL Classification: E62, J61, H60, O41.