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The coordination of capital income and profit taxation with cross-ownership of firms

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  • Huizinga, Harry
  • Nielsen, Soren Bo

Abstract

This paper investigates the scope for international coordination of capital income and profit taxation.The paper considers a world of many symmetric countries where public goods are financed by taxes on capital income and on profits.In the open economy, the authorities have at their disposal a residence-based saving tax, a source-based investment tax and a profit tax. Determinants of the tax mix are the foreign ownership of domestic firms, if any, and the extent to which the profit tax is feasible.Noncooperative tax policy in the open economy is compared to the corresponding tax policy in the closed economy where a single tax instrument determines the wedge between the returns to saving and investment.There generally is a scope for a coordinated increase in this tax wedge if the noncoordinated tax wedge is negative or very large, and vice versa.There is no need for tax coordination if there is no foreign ownership or if profits are taxed fully.The cases for tax coordination when in the noncoordinated scenario there either is no saving tax or no investment tax are also considered.

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Bibliographic Info

Article provided by Elsevier in its journal Regional Science and Urban Economics.

Volume (Year): 32 (2002)
Issue (Month): 1 (January)
Pages: 1-26

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Handle: RePEc:eee:regeco:v:32:y:2002:i:1:p:1-26

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  1. Gordon, Roger H, 1986. "Taxation of Investment and Savings in a World Economy," American Economic Review, American Economic Association, vol. 76(5), pages 1086-1102, December.
  2. Persson, Torsten & Tabellini, Guido, 1995. "Double-Edged Incentives: Institutions and Policy Coordination," CEPR Discussion Papers 1141, C.E.P.R. Discussion Papers.
  3. Harry Huizinga & Soeren Bo Nielsen, . "Capital Income and Profits Taxation with Foreign Ownerwhip of Firms," EPRU Working Paper Series 95-09, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
  4. Wildasin, David E. & Wilson, John Douglas, 1998. "Risky local tax bases: risk-pooling vs. rent-capture," Journal of Public Economics, Elsevier, vol. 69(2), pages 229-247, June.
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  13. 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.
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  15. Dasgupta, Partha & Stiglitz, Joseph E, 1972. "On Optimal Taxation and Public Production," Review of Economic Studies, Wiley Blackwell, vol. 39(1), pages 87-103, January.
  16. Peter A. Diamond & J. A. Mirrlees, 1968. "Optimal Taxation and Public Production," Working papers 22, Massachusetts Institute of Technology (MIT), Department of Economics.
  17. Razin, Assaf & Sadka, Efraim, 1991. "International tax competition and gains from tax harmonization," Economics Letters, Elsevier, vol. 37(1), pages 69-76, September.
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