Patrice Pieretti

On the desirability of tax coordination when countries compete in taxes and infrastructure

In our paper, we demonstrate that when countries compete in taxes and infrastructure, coordination through a uniform tax rate or a minimum rate does not necessarily create the welfare effects observed under pure tax competition. The divergence is even worse when the competing jurisdictions differ in institutional quality. If tax revenues are used to gauge the desirability of coordination, our model demonstrates that imposing a uniform tax rate is Pareto-inferior to the non-cooperative equilibrium when countries compete in taxes and infrastructure. This result is completely reversed under pure tax competition if the countries are sufficiently similar in size. If a minimum tax rate is set within the range of those resulting from the non-cooperative equilibrium, the low tax country will never be better off. Finally, the paper demonstrates that the potential social welfare gains from tax harmonization crucially depend on the degree of heterogeneity among the competing countries.

Can the Financial Sector continue to be the Main Growth Engine in Luxembourg

The financial sector has emerged as the main economic engine over the past two decades. The comparative advantages of placing financial activities in Luxembourg have mostly been in terms of an adaptive legislative and regulatory framework and low taxation. As a result, Luxembourg is today one of the main international centres for investment funds. Besides the sector’s direct and indirect employment effects, the most important effect is the large tax revenue generating capacity of the sector, accounting directly for over 20% of aggregate tax revenues. On the other hand, these tax revenues are volatile as the sector is highly sensitive to developments in international financial markets. Indeed, past downturns in international financial markets have tended to lead to a sharp slowdown of growth in the economy as well as in revenues, pointing to potential large risks associated with the current turmoil in international financial markets. Besides these short-term considerations, a lower trend growth rate of the sector is likely over the medium term. The main activities of the sector are in middle and back offices dealing with financial administration which, with new IT technologies, will tend to be increasingly outsourced. At the same time, the sector is having problems in attracting highly specialised talent to enter higher value front office activities. Over the longer term, international competition will continue to exert pressures that may eventually erode Luxembourg’s position. The extent of the decline in the sector’s trend growth depends on the ability to maintain and expand the attractiveness of investing and working in Luxembourg. Achieving this will depend on being able to adjust tax, infrastructure, and housing policies to attract foreign talent while updating and increasing the transparency of financial sector regulation.

Does tax competition increase infrastructural disparity among jurisdictions

This paper investigates whether an economy that lags behind in infrastructure compared with other countries can make up its shortfall when it competes for foreign direct investments. The main message of the paper is that jurisdictional competition can enable the lagging country to reduce the infrastructural gap if capital mobility is sufficiently high and the gap is not too large. Further, we show that size asymmetry reinforces (weakens) the effect in reducing the infrastructural disparity resulting from interjurisdictional competition when the lagging economy is small (large).

Immigration, occupational choice and public employment

This paper investigates the theoretical effects of immigration in an occupational choice model with three sectors: a low-skilled, a high-skilled and a public sector. The originality of our approach is to consider (i) intersectoral mobility of labor and (ii) public employment. We highlight the fact that including a public sector is crucial, since omitting it implies that low-skilled immigration unambiguously reduces wages and welfare of all workers. However, when public employment is considered, we demonstrate that immigration increases wages in the high-skilled and the public sectors, provided that the immigrant workforce is not too large and the access to public jobs is not too easy. The average wage of natives may also increase accordingly. Moreover, immigration may improve workers’ welfare in each sector. Finally, the mechanism underlying these results does not require complementarity between natives and immigrants.

Does Size Asymmetry Exacerbate the Inefficiency of Tax Competition

Many authors demonstrate that the tax gap resulting from tax competition increases with the size asymmetry of the competing countries. Consequently, increasing country-size disparities exacerbates the inefficiency of tax competition. The aim of this note is to show that this classical view has no general validity, if we consider that countries compete not only in taxes, but also in the provision of infrastructure. The simple model we develop for this purpose demonstrates that the effect of size disparity on efficiency depends crucially on the degree of international capital mobility.

The impact of migration on origin countries: a numerical analysis

The focus of this article is on the impact of high-skilled emigration on fertility and human capital of a sending country within an overlapping generations model where parents choose to finance higher education to a certain number of their children. We assume that high- and low-skilled children emigrate with a certain probability when they reach adulthood and that they send remittances to their parents back home. The model shows that an increase in the intensity of the brain drain induces parents to provide more higher education to their children and to raise less low-skilled children. The impact on fertility and on human capital formation however remains unclear. This is why we run numerical simulations by calibrating our model to a developing country like the Philippines. The calibration results show in particular, that increased brain drain lowers fertility and boosts long-run human capital formation in the sending country.