Taxation and International Migration of Top Earners: Evidence from the Foreigner Tax Scheme in Denmark

Abstract

This paper analyzes the eects of income taxation on the international migration of top earners using the Danish preferential foreigner tax scheme. This scheme, introduced in 1991, allows immigrants with high earnings (above 103,000 Euros per year as of 2009) to be taxed at a at rate of 25% for a duration of three years instead of the regular progressive schedule with a top marginal tax rate of 59%. Using population wide Danish administrative tax data, we show that the scheme doubled the number of highly paid foreigners in Denmark relative to slightly less paid ineligible foreigners, which translates into a very large elasticity of migration with respect to the net-of-tax rate in excess of one. There is bunching of earnings at the scheme eligibility threshold, evidence of a signicant but quantitatively very small response along the intensive earnings margin (work eort or