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Taxation if Capital is not Perfectly Mobile: Tax Competition versus Tax Exportation

  • Sylvester C.W. Eijffinger
  • Wolf Wagner

This paper analyzes the tax competition and tax exporting effect of financial integration. On the one hand, financial integration increases capital mobility and thus the incentive for countries to compete for capital. On the other hand, financial integration increases foreign ownership of firms and capital and allows for exportation of source taxes. Both effects have contrary implications for capital taxes. Allowing for imperfectly mobile capital, our analysis suggests that currently the tax exportation effect is dominating, which implies excessive capital taxation. From studying the benchmark of full financial integration we find that capital taxes are likely to increase from current levels. We further examine the tax exportation effect empirically and find that is significant as well as quantitatively important for the U.S.

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Paper provided by Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics in its series EPRU Working Paper Series with number 02-07.

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Handle: RePEc:kud:epruwp:02-07
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  1. Razin, Assaf & Sadka, Efraim, 1991. "International tax competition and gains from tax harmonization," Economics Letters, Elsevier, vol. 37(1), pages 69-76, September.
  2. Mihir A. Desai & James R. Hines Jr., 2001. "Foreign Direct Investment in a World of Multiple Taxes," NBER Working Papers 8440, National Bureau of Economic Research, Inc.
  3. Peter Birch Sørensen, 2001. "International Tax Coordination: Regionalism Versus Globalism," CESifo Working Paper Series 483, CESifo Group Munich.
  4. Hines, James R. Jr., 1999. "Lessons from Behavioral Responses to International Taxation," National Tax Journal, National Tax Association, vol. 52(n. 2), pages 305-22, June.
  5. Huizinga, H.P. & Nielsen, S.B., 1997. "Capital income and profit taxation with foreign ownership of firms," Other publications TiSEM b4f6a916-7f7f-4fe1-9cf0-c, Tilburg University, School of Economics and Management.
  6. Swenson, Deborah L., 1994. "The impact of U.S. tax reform on foreign direct investment in the United States," Journal of Public Economics, Elsevier, vol. 54(2), pages 243-266, June.
  7. Eckhard Janeba, 2000. "Tax Competition When Governments Lack Commitment: Excess Capacity as a Countervailing Threat," American Economic Review, American Economic Association, vol. 90(5), pages 1508-1519, December.
  8. Peter Birch Sørensen, . "International Tax Coordination: Regionalism versus Globalism," EPRU Working Paper Series 01-08, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
  9. Lee, Kangoh, 1997. "Tax Competition with Imperfectly Mobile Capital," Journal of Urban Economics, Elsevier, vol. 42(2), pages 222-242, September.
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