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Can Capital Income Taxes Survive in an Open Economies

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  • Gordon, R.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.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Gordon, R.H., 1990. "Can Capital Income Taxes Survive in an Open Economies," Working Papers 280, Research Seminar in International Economics, University of Michigan.
    • Handle: RePEc:mie:wpaper:280
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    References listed on IDEAS

    as
    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.
    3. Alberto Giovannini & James R. Hines, Jr., 1990. "Capital Flight and Tax Competition: Are There Viable Solutions to Both Problems?," NBER Working Papers 3333, National Bureau of Economic Research, Inc.
    4. Auerbach, Alan J, 1991. "Retrospective Capital Gains Taxation," American Economic Review, American Economic Association, vol. 81(1), pages 167-178, March.
    5. Roger H. Gordon, 1983. "An Optimal Taxation Approach to Fiscal Federalism," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 98(4), pages 567-586.
    6. Roger H. Gordon & Joel Slemrod, 1988. "Do We Collect Any Revenue from Taxing Capital Income?," NBER Chapters, in: Tax Policy and the Economy: Volume 2, pages 89-130, National Bureau of Economic Research, Inc.
    7. Peter A. Diamond & J. A. Mirrlees, 1968. "Optimal Taxation and Public Production," Working papers 22, Massachusetts Institute of Technology (MIT), Department of Economics.
    8. repec:bla:ecorec:v:62:y:1986:i:177:p:208-14 is not listed on IDEAS
    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.
    12. Hans-Werner Sinn, 1990. "Can Direct and Indirect Taxes Be Added for International Comparisons of Competitiveness?," NBER Working Papers 3263, National Bureau of Economic Research, Inc.
    13. Bond, Eric W & Samuelson, Larry, 1989. "Strategic Behaviour and the Rules for International Taxation of Capital," Economic Journal, Royal Economic Society, vol. 99(398), pages 1099-1111, December.
    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.
    15. Christopher C. Findlay, 1986. "Optimal Taxation of International Income Flows," The Economic Record, The Economic Society of Australia, vol. 62(2), pages 208-214, June.
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    Keywords

    taxes ; income;

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