Optimal Taxation and Human Capital Policies Across Space

Abstract

In this senior thesis, I study how the presence of migration affects the optimal taxation and educational investment policies of competing governments seeking to maximize tax revenue. I develop a model that captures both intensive-margin labor supply decisions and extensive-margin migration decisions. Using this framework, I derive elasticity-based formulas for optimal tax rates and public education investment, with and without migration. I show that migration lowers optimal tax rates and distorts education spending policy in the baseline model, particularly in low-productivity regions. I then extend the model to include features such as intergenerational concerns and remittances, where the presence of remittances offers a counterexample in which migration can actually increase the optimal tax and education spending. I prove that the model exhibits spatial sorting and regional inequality, which motivates a role for distortionary central government intervention. I calibrate the model to U.S. Census data and evaluate the main results numerically. Finally, I conclude and suggest future directions of research.