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The Welfare Effects of a Capital Income Tax in an Open Economy

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  • David G. Hartman

Abstract

International capital mobility has typically been ignored in discussions of the welfare effects of the capital income tax. In the a typical analysis which does consider the open economy it is recognized that highly-elastic capital flows could significantly alter the usual conclusions. While there have been strenuous debates about the elasticity of international capital flows, there can be little disagreement that international ownership of capital is an important and growing phenomenon. In this paper, we explore the welfare effects of changes in the capital income tax from a different perspective: that of a country in which foreign ownership of a portion of the capital stock and foreign owners' payment of taxesis a reality. With this modification in emphasis, a simple graphical analysis is sufficient to indicate that international capital ownership could easily dominate other welfare effects of tax changes. At least, the arguments presented in this paper raise a caution about ignoring the openness of the economy simply because elasticities are believed small.

Suggested Citation

  • David G. Hartman, 1985. "The Welfare Effects of a Capital Income Tax in an Open Economy," NBER Working Papers 1551, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:1551
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    References listed on IDEAS

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    1. Martin Feldstein, 1978. "The Welfare Cost of Capital Income Taxation," NBER Chapters, in: Research in Taxation, pages 29-51, National Bureau of Economic Research, Inc.
    2. Martin Feldstein, 1983. "Behavioral Simulation Methods in Tax Policy Analysis," NBER Books, National Bureau of Economic Research, Inc, number feld83-2, July.
    3. Don Fullerton & Andrew B. Lyon & Richard J. Rosen, 1983. "Uncertainty, Welfare Cost, and the 'Adaptability' of U.S. Corporate Taxes," NBER Working Papers 1239, National Bureau of Economic Research, Inc.
    4. Alan J. Auerbach, 1983. "Corporate Taxation in the United States," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 14(2), pages 451-514.
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    Cited by:

    1. Kind, Hans Jarle & Knarvik, Karen Helene Midelfart & Schjelderup, Guttorm, 2000. "Competing for capital in a 'lumpy' world," Journal of Public Economics, Elsevier, vol. 78(3), pages 253-274, November.
    2. David G. Hartman, 1985. "On the Optimal Taxation of Capital Income in the Open Economy," NBER Working Papers 1550, National Bureau of Economic Research, Inc.
    3. Muhammad Sabir & Zehra Aftab, 2006. "Province-wise Growth Patterns in Human Capital Accumulation," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 45(4), pages 873-890.

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