The optimal taxation of foreign and domestic investors' incomes is examined with a simple overlapping-generations model. Even when tax rates are allowed to discriminate between these groups,the optimal tax rates on both domestic and foreign investors' incomes in the small open economy are identical and equal to the optimal rate of tax in the closed economy. In light of the emphasis in the literature on the extent to which the elasticity of international flows might lower optimal capital income taxes, this conclusion is quite a surprise. In the large open economy, the optimal tax rate on foreign investors'income alone is a weighted average of one and the small economy tax rate. The optimal tax rate on domestic income is, again, unaffected by the openness ofthe economy. When a uniform tax rate must be set in the large open economy, it is generally higher than the optimal tax rate for a closed economy, a conclusion contrary to the conventional wisdom. However, a higher elasticity of international capital flows is associated with a lower tax rate, as expected, butthe rate remains above the closed-economy rate. In summary, openness matters for optimal tax policy, primarily in the case of the large economy. The reason is mainly the ability to burden foreign investors with a tax liability.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Publisher Info
Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
1550.
Length: Date of creation: Jan 1985 Date of revision: Handle: RePEc:nbr:nberwo:1550
Note: PE Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A. Phone: 617-868-3900 Email: Web page: http://www.nber.org More information through EDIRC
For technical questions regarding this item, or to correct its listing, contact: ().
Related research
Keywords:
Other versions of this item:
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)