We study how regional productivity di¤erences and labor mobility shape optimal Mirrleesian tax-transfer schemes. When tax schedules are not allowed to di¤er across regions, productivity-enhancing inter-regional migration exerts a downward pressure on optimal marginal tax rates. When regionally di¤erentiated taxation is allowed, marginal tax rates in high-(low-)productivity regions should be corrected downwards (upwards) relative to the benchmark without migration. Simulations of the productivity di¤erences between metropolitan and other areas of the US indicate that migration a¤ects the optimal tax-transfer schedule more strongly in the regionally di¤erentiated rather than in the undi¤erentiated case.

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