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

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  • David G. Hartman
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    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.

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1551.

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    Date of creation: Jan 1985
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    Publication status: Published as "Taxation and the Effects of Inflation on the Real Capitol Stock in an Open Economy", International Economic Review, Vol. 20, no. 2(1979): 417-426.
    Handle: RePEc:nbr:nberwo:1551

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    Cited by:
    1. Hans Jarle Kind & Helene Midelfart & Guttorm Schjelderup, 2000. "Competing for Capital in a "Lumpy" World," CESifo Working Paper Series 252, CESifo Group Munich.
    2. 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.
    3. 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.

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