DP18455 Should I Pay or Should I Go? Dutch Evidence on Tax-Induced Out-Migration
We investigate the mobility response of workers to a loss in preferential tax treatment, exploiting a radical policy change that shortened the duration of the tax break available to high-skilled migrants to the Netherlands. The policy change only affected migrants who arrived from specific countries within a certain period. Using tax and population-wide data and a difference-in-differences approach, we uncover the causal effect of tax-induced emigration and show that taking away tax breaks from migrants strongly increases their likelihood of leaving. Crucially, our findings show that this effect is entirely driven by out-migration from the top 1% of the income distribution. No migration response was detected for those below the 95th earnings percentile. Individuals in the top 1% of the income distribution decrease their length of stay by 11.1% and are 18.3% less likely to remain beyond the end of the five years that they receive the tax break, while ‘highly mobile’ individuals also react in terms of both intensive and extensive duration margins when among top 5% of earners. We estimate that the elasticity of migration with respect to the net-of-tax rate for the top 1% of earners is 1.48 to 1.74. Regarding the distortionary effect of national policies on international tax competition, we show that the most mobile tax earners become much more likely to leave for a tax-friendly country post reform, and we conclude that, at least in terms of the change in taxable receipts from labor in the Netherlands, this policy was cost neutral.