Economics of Macro Issues 7th Edition by Roger LeRoy Miller,Daniel Benjamin

Exercise 6

How does the structure of a country's tax system affect who decides to immigrate into the nation or emigrate out of the nation? Contrast, for example, nations A and B. Assume that nation A applies a 20 percent tax rate on every dollar of income earned by an individual (i.e., 20 cents in taxes must be paid on each dollar of income). Nation B applies a 10 percent tax rate (1.0 cents per dollar) on the first $40,000 per year of income and a 40 percent tax rate (40 cents per dollar) on all income above $40,000 per year earned by an individual. Start by computing the tax bill in each country that must be paid by a person earning $40,000 per year and the tax bill that must be paid by a person earning $100,000 per year. Then consider the more general issue: If the language, culture, and climate of the two nations are similar and if a person can choose to live on one side or the other of a river separating the two nations, who is more likely to choose to live in A, and who is more likely to choose to live in B? To what extent does your reasoning apply if an ocean, rather than a river, separates the two countries? Does it apply if the language, culture, or climate in the two nations differs? Explain.