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Capital Income and Profits Taxation with Foreign Ownerwhip of Firms

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  • Harry Huizinga
  • Soeren Bo Nielsen

Abstract

This paper establishes in the simplest possible way optimal rules for capital income and profits taxation in the open economy with or without foreign ownership of doemstic firms. We show that if there are constraints on the feasibility of profits taxation, both saving and investment taxes generally enter the optimal tax package. If instead profits can be fully taxed, then source-based investment taxes vanish. If domestic firms are in part owned by foreigners, then source-based investment taxes can be used to shift income away from these to domestic citizens and they may even be used to finance lump sum transfers to domestic residents.

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Bibliographic Info

Paper provided by Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics in its series EPRU Working Paper Series with number 95-09.

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Handle: RePEc:kud:epruwp:95-09

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  1. Mintz, J. & Tulkens, H., . "Optimality properties of alternative systems of taxation of foreign capital income," CORE Discussion Papers RP -1212, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. 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.
  3. Roger H. Gordon & Jeffrey K. MacKie-Mason, 1995. "Why Is There Corporate Taxation in a Small Open Economy? The Role of Transfer Pricing and Income Shifting," NBER Chapters, in: The Effects of Taxation on Multinational Corporations, pages 67-94 National Bureau of Economic Research, Inc.
  4. Bruce, Neil, 1992. "A Note on the Taxation of International Capital Income Flows," The Economic Record, The Economic Society of Australia, vol. 68(202), pages 217-21, September.
  5. Bruce, N., 1992. "Why Are There Foreign Tax Credits," Working Papers 92-08, University of Washington, Department of Economics.
  6. 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.
  7. Joseph E. Stiglitz & Partha Dasgupta, 1970. "Differential Taxation, Public Goods, and Economic Efficiency," Cowles Foundation Discussion Papers 299, Cowles Foundation for Research in Economics, Yale University.
  8. Jacob Frenkel & Assaf Razin & Efraim Sadka, 1991. "International Taxation in an Integrated World," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262512149, December.
  9. Huizinga, Harry, 1995. "The optimal taxation of savings and investment in an open economy," Economics Letters, Elsevier, vol. 47(1), pages 59-62, January.
  10. Diamond, Peter A & Mirrlees, James A, 1971. "Optimal Taxation and Public Production II: Tax Rules," American Economic Review, American Economic Association, vol. 61(3), pages 261-78, June.
  11. 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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