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A Pecking Order Theory of Capital Inflows and International Tax Principles

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  • Razin, Assaf
  • Sadka, Efraim
  • Yuen, Chi-Wa

Abstract

Even though financial markets today show a high degree of integration, the world capital market is still far from the textbook story of high capital mobility. The failure to have a tax scheme in which the rate of returns across countries are equated can result in inefficient capital flows across countries. This comes from the interactions of market failure and the tax system. The purpose of this paper is to highlight some key sources of market failure in the context of international capital flows and to provide guidelines for efficient tax structure in the presence of capital market imperfections. We distinguish among three main types of international capital flows: foreign portfolio debt investment (FPDI), foreign portfolio equity investment (FPEI), and foreign direct investment (FDI). The paper emphasizes the efficiency of non-uniform tax treatment of the various vehicles of international capital flows.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1381.

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Date of creation: Apr 1996
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Handle: RePEc:cpr:ceprdp:1381

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Keywords: Capital Inflows; Foreign Direct Investment; Foreign Portfolio Debt Investment; Foreign Portfolio Equity Investment; International Tax Principles;

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Cited by:
  1. Zhaohui Chen & Jorge A. Chan-Lau, 1998. "Financial Crisis and Credit Crunch as a Result of Inefficient Financial Intermediation - with Reference to the Asian Financial Crisis," IMF Working Papers 98/127, International Monetary Fund.

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