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Tax Policy and International Capital Flows

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  • Martin Feldstein

Abstract

Although capital is now generally free to move across national borders, there is strong evidence that savings tend to remain and to be invested in the country where the saving takes place. The current paper examines the apparent conflict between the potential mobility of capital and the observed de facto segmentation of the global capital market. The key to reconciling this 'Feldstein-Horioka paradox' is that, although capital is free to move, its owners, and especially the agents who are responsible for institutional investments, prefer to keep funds close to home because of a combination of risk aversion, ignorance and a desire to show prudence in their investing behavior. The paper presents evidence on the capital mobility and on capital market segmentation. The role of hedging and the difference between gross and net capital movements for individual investors and borrowers are discussed. The special place of foreign direct investment is also considered. The segmentation of the global capital market affects the impact of capital income taxes and subsidies. This is discussed in the final section of the paper

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4851.

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Date of creation: Aug 1997
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Handle: RePEc:nbr:nberwo:4851

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  4. Martin S. Feldstein, 1995. "The Effects of Outbound Foreign Direct Investment on the Domestic Capital Stock," NBER Chapters, in: The Effects of Taxation on Multinational Corporations, pages 43-66 National Bureau of Economic Research, Inc.
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  7. French, Kenneth R. & Poterba, James M., 1990. "Japanese and U.S. cross-border common stock investments," Journal of the Japanese and International Economies, Elsevier, vol. 4(4), pages 476-493, December.
  8. Eichengreen, Barry, 1990. "Trends and Cycles in Foreign Lending," Department of Economics, Working Paper Series qt82z7083m, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  9. Martin Feldstein & Philippe Bacchetta, 1992. "National Saving and International Investment," NBER Working Papers 3164, National Bureau of Economic Research, Inc.
  10. Maurice Obstfeld, 1994. "International capital mobility in the 1990s," International Finance Discussion Papers 472, Board of Governors of the Federal Reserve System (U.S.).
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  21. Brainard, William C & Tobin, James, 1992. "On the Internationalization of Portfolios," Oxford Economic Papers, Oxford University Press, vol. 44(4), pages 533-65, October.
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  23. Baxter, Marianne & Crucini, Mario J, 1993. "Explaining Saving-Investment Correlations," American Economic Review, American Economic Association, vol. 83(3), pages 416-36, June.
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  26. Martin Feldstein, 1982. "Domestic Saving and International Capital Movements in the Long Run and the Short Run," NBER Working Papers 0947, National Bureau of Economic Research, Inc.
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