Should Foreign Capital Be Taxed for Fiscal Expansion?
This paper studies the income distribution implications of a fiscal expansion financed by foreign capital in a small open economy. Utilizing a multi-sector gen - eral equilibrium model, four results are derived for a stable equilibrium: (1) domestic private agents’ welfare may be reduced by fiscal expansion even if agents do not finance the expansion; (2) the fiscal authority’s welfare may be reduced by fiscal expansion even if more resources are allocated for the authority’s consump - tion; (3) the after-tax rental income of the foreign capital’s owners may be increased even if they finance the fiscal expansion; and (4) fiscal spending may be contractionary for domestic residents (private agents and fiscal authority) even if the spending is financed by non-residents.
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