The Political Economy of Capital Income and Profit Taxation in a Small Open Economy

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The Political Economy of Capital Income and Profit Taxation in a Small Open Economy

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Harry Huizinga
Søren Bo Nielsen

Abstract

This paper considers the political economy of the mix of profit, investment and saving taxation in a small open economy where agents generally differ in their shares of profit and other income. In this setting, capital income taxation can have the dual role of financing government spending and of redistributing income. With majority voting, the paper can explain why distorting saving taxation exists, even if profits are not taxed to the fullest extent. Alternatively, saving may be subsidized, even if profit and investment are highly taxed. This paper further examines the role of the foreign ownership of domestic firms in explaining capital income taxation.

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Paper provided by Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics in its series EPRU Working Paper Series with number 97-01.

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Handle: RePEc:kud:epruwp:97-01

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This paper has been announced in the following NEP Reports:

NEP-ALL-2003-05-08 (All new papers)
NEP-LAM-2003-05-08 (Central & South America)
NEP-POL-2003-05-08 (Positive Political Economics)

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Huizinga, Harry & Nielsen, Soren Bo, 1997. "Capital income and profit taxation with foreign ownership of firms," Journal of International Economics, Elsevier, vol. 42(1-2), pages 149-165, February. [Downloadable!] (restricted)
Other versions:
- 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.
- Huizinga, H. & Nielsen, S.B., 1995. "Capital Income and Profits Taxation with Foreign Ownership of Firms," Papers 9582, Tilburg - Center for Economic Research.
Bucovetsky, Sam & Wilson, John Douglas, 1991. "Tax competition with two tax instruments," Regional Science and Urban Economics, Elsevier, vol. 21(3), pages 333-350, November. [Downloadable!] (restricted)
Huizinga, H. & Nielsen, S.B., 1996. "The coordination of capital income and profit taxation with crossownership of firms," Discussion Paper 104, Tilburg University, Center for Economic Research. [Downloadable!]
Other versions:
- Harry Huizinga & Søren Bo Nielsen, . "The Coordination of Capital Income and Profit Taxation with Cross-Ownership of Firms," EPRU Working Paper Series 96-17, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
- Huizinga, Harry & Nielsen, Soren Bo, 2002. "The coordination of capital income and profit taxation with cross-ownership of firms," Regional Science and Urban Economics, Elsevier, vol. 32(1), pages 1-26, January. [Downloadable!] (restricted)
Mayer, Wolfgang, 1984. "Endogenous Tariff Formation," American Economic Review, American Economic Association, vol. 74(5), pages 970-85, December. [Downloadable!] (restricted)
Dasgupta, Partha & Stiglitz, Joseph E, 1972. "On Optimal Taxation and Public Production," Review of Economic Studies, Blackwell Publishing, vol. 39(1), pages 87-103, January. [Downloadable!] (restricted)
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. [Downloadable!] (restricted)
Bucovetsky, Sam, 1991. "Choosing tax rates and public expenditure levels using majority rule," Journal of Public Economics, Elsevier, vol. 46(1), pages 113-131, October. [Downloadable!] (restricted)

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