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Can Capital Income Taxes Survive in Open Economies?

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  • Gordon, Roger H

Abstract

Optimal-tax theory forecasts that small open economies should not tax capital income. Yet, countries do tax capital income. Why the inconsistency? This paper shows that use of the double-taxation convention, whereby governments credit taxes paid abroad against domestic taxes, helps explain this inconsistency. In particular, capital income will be taxed if a dominant capital exporter acts as a Stackelberg leader when setting its tax policy. Due to the convention, other countries will then tax capital imports, making it attractive for the dominant capital exporter to tax capital income. Without a dominant capital exporter, however, the model still forecasts no capital-income taxes. Copyright 1992 by American Finance Association.

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Bibliographic Info

Article provided by American Finance Association in its journal Journal of Finance.

Volume (Year): 47 (1992)
Issue (Month): 3 (July)
Pages: 1159-80

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Handle: RePEc:bla:jfinan:v:47:y:1992:i:3:p:1159-80

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  1. Auerbach, Alan J, 1991. "Retrospective Capital Gains Taxation," American Economic Review, American Economic Association, vol. 81(1), pages 167-78, March.
  2. Hartman, David G., 1985. "Tax policy and foreign direct investment," Journal of Public Economics, Elsevier, vol. 26(1), pages 107-121, February.
  3. Roger H. Gordon & Hal R. Varian, 1986. "Taxation of Asset Income in the Presence of a World Securites Market," NBER Working Papers 1994, National Bureau of Economic Research, Inc.
  4. Assaf Razin & Efraim Sadka, 1990. "Capital Market Integration: Issues of International Taxation," NBER Working Papers 3281, National Bureau of Economic Research, Inc.
  5. Hans-Werner Sinn, 1990. "Can Direct and Indirect Taxes Be Added for International Comparisons of Competitiveness?," NBER Working Papers 3263, National Bureau of Economic Research, Inc.
  6. Bond, E.W. & Samuelson, L., 1988. "Strategic Behavior And The Rules For International Taxation Of Capital," Papers 3-88-10, Pennsylvania State - Department of Economics.
  7. Gordon, Roger H, 1983. "An Optimal Taxation Approach to Fiscal Federalism," The Quarterly Journal of Economics, MIT Press, vol. 98(4), pages 567-86, November.
  8. Findlay, Christopher C, 1986. "Optimal Taxation of International Income Flows," The Economic Record, The Economic Society of Australia, vol. 62(177), pages 208-14, June.
  9. Roger H. Gordon & Joel Slemrod, 1988. "Do We Collect Any Revenue from Taxing Capital Income?," NBER Chapters, in: Tax Policy and the Economy: Volume 2, pages 89-130 National Bureau of Economic Research, Inc.
  10. Alberto Giovannini & James R. Hines, Jr., 1990. "Capital Flight and Tax Competition: Are There Viable Solutions to Both Problems?," NBER Working Papers 3333, National Bureau of Economic Research, Inc.
  11. Peter A. Diamond & J. A. Mirrlees, 1968. "Optimal Taxation and Public Production," Working papers 22, Massachusetts Institute of Technology (MIT), Department of Economics.
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