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Can Capital Income Taxes Survive in Open Economies?

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  • Gordon, Roger H

Abstract

Optimal-tax theory forecasts that small open economies should not tax capital income. Yet, countries do tax capital income. Why the inconsistency? This paper shows that use of the double-taxation convention, whereby governments credit taxes paid abroad against domestic taxes, helps explain this inconsistency. In particular, capital income will be taxed if a dominant capital exporter acts as a Stackelberg leader when setting its tax policy. Due to the convention, other countries will then tax capital imports, making it attractive for the dominant capital exporter to tax capital income. Without a dominant capital exporter, however, the model still forecasts no capital-income taxes. Copyright 1992 by American Finance Association.

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  • Gordon, Roger H, 1992. "Can Capital Income Taxes Survive in Open Economies?," Journal of Finance, American Finance Association, vol. 47(3), pages 1159-1180, July.
  • Handle: RePEc:bla:jfinan:v:47:y:1992:i:3:p:1159-80
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    1. Razin, A. & Sadka, E., 1989. "Capital Market Integration: Issues Of International Taxation," Papers 40-89, Tel Aviv.
    2. Gordon, Roger H. & Varian, Hal R., 1989. "Taxation of asset income in the presence of a world securities market," Journal of International Economics, Elsevier, vol. 26(3-4), pages 205-226, May.
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    9. Hartman, David G., 1985. "Tax policy and foreign direct investment," Journal of Public Economics, Elsevier, vol. 26(1), pages 107-121, February.
    10. Diamond, Peter A & Mirrlees, James A, 1971. "Optimal Taxation and Public Production II: Tax Rules," American Economic Review, American Economic Association, vol. 61(3), pages 261-278, June.
    11. Diamond, Peter A & Mirrlees, James A, 1971. "Optimal Taxation and Public Production: I--Production Efficiency," American Economic Review, American Economic Association, vol. 61(1), pages 8-27, March.
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    14. Gordon, Roger & Kalambokidis, Laura & Slemrod, Joel, 2004. "Do we now collect any revenue from taxing capital income?," Journal of Public Economics, Elsevier, vol. 88(5), pages 981-1009, April.
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