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Residence- and source-based capital taxation in open economies with infinitely-lived consumers

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  • Gross, Till
  • Klein, Paul
  • Makris, Miltiadis

Abstract

In this paper we investigate tax competition in a neoclassical growth model where each country may use both residence- and source-based capital taxes. We show that both types of capital taxes are zero at any interior steady state, just as in a closed economy. For symmetric countries, and even for countries that differ only with respect to size and productivity, we prove analytically and verify numerically that the open-economy policies coincide exactly with the closed-economy policies in all time periods. For countries that are asymmetric in other dimensions, we find that source-based taxes are used to manipulate the intertemporal terms of trade in the short run. Either way, the fiscal externalities of source-based taxes vanish once residence-based taxes are allowed.

Suggested Citation

  • Gross, Till & Klein, Paul & Makris, Miltiadis, 2020. "Residence- and source-based capital taxation in open economies with infinitely-lived consumers," Journal of International Economics, Elsevier, vol. 127(C).
  • Handle: RePEc:eee:inecon:v:127:y:2020:i:c:s0022199620300842
    DOI: 10.1016/j.jinteco.2020.103369
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    More about this item

    Keywords

    Residence principle; Capital tax competition; Dynamic optimal taxation; Open economy; Ramsey taxation;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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