Optimal Mixed Taxation, Public Goods and the Problem of Migration by the Highly Skilled

The optimal income tax model under the threat of migration is extended to include both indirect taxes and public goods. This has enabled us to check that: 1) optimal income tax rates are higher than in the absence of indirect taxes and, at the top of the skills distribution, may be positive; 2) even under weakly separable preferences country-specific goods should be subsidized so as to increase the migration costs of highly skilled workers; 3) migration encourages the provision of public goods preferred by the most productive workers. The conclusion from a policy perspective is that indirect taxes à la Corlett and Hague, subsidization of country-specific goods and provision of public goods may help mitigate the loss of redistributive capacity through income taxation caused by migration. However, if the number of potential migrators is large, it might be desirable to violate classical tax rules to retain the most able in their home country