Taxing Internationally Mobile Individuals—A Case of Countervailing Incentives

With internationally mobile labour and the abolition of national border controls, the individual may not only have private information about his skill level (adverse selection), but also about the length of time he resides and works in the home country (moral hazard) and about his foreign income. To reduce domestic income taxes, the individual has an incentive to understate his domestic utility and to exaggerate the utility he could obtain by spending additional time abroad. Under the reasonable assumption that these are positively correlated, incentives are countervailing. The optimal government policy may be implemented by a tax schedule containing negative, zero, and positive marginal income tax rates.