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Why Is Capital So Immobile Internationally?: Possible Explanations and Implications for Capital Income Taxation

  • Gordon, R.H.
  • Bovenberg, A.L.

The evidence on international capital immobility is extensive, ranging from the correlations between domestic savings and investment pointed out by Feldstein-Horioka (1980), to real interest differentials across countries, to the lack of international portfolio diversification. To what degree does capital immobility modify past results forecasting that small open economies should not tax savings or investment? The answer depends on the cause of this immobility. We argue that asymmetric information between countries provides the most plausible explanation for the above observations. When we examine optimal tax policy in an open economy allowing for asymmetric information, rather than simply finding that savings and investment should not be taxed, we now forecast government subsidies to foreign acquisitions of domestic firms. Some omitted factors that would argue against subsidizing foreign acquisitions are explored briefly.

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Paper provided by Research Seminar in International Economics, University of Michigan in its series Working Papers with number 358.

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Length: 21 pages
Date of creation: 1994
Date of revision:
Handle: RePEc:mie:wpaper:358
Contact details of provider: Postal: ANN ARBOR MICHIGAN 48109
Web page: http://fordschool.umich.edu/rsie/

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  1. Michael Dooley & Jeffrey Frankel & Donald J. Mathieson, 1987. "International Capital Mobility: What Do Saving-Investment Correlations Tell Us?," IMF Staff Papers, Palgrave Macmillan, vol. 34(3), pages 503-530, September.
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  8. Tamim Bayoumi, 1990. "Saving-Investment Correlations: Immobile Capital, Government Policy, or Endogenous Behavior?," IMF Staff Papers, Palgrave Macmillan, vol. 37(2), pages 360-387, June.
  9. Harris, Robert S & Ravenscraft, David, 1991. " The Role of Acquisitions in Foreign Direct Investment: Evidence from the U.S. Stock Market," Journal of Finance, American Finance Association, vol. 46(3), pages 825-44, July.
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  18. Mishkin, Frederic S, 1984. " Are Real Interest Rates Equal across Countries? An Empirical Investigation of International Parity Conditions," Journal of Finance, American Finance Association, vol. 39(5), pages 1345-57, December.
  19. Goodspeed, T-J & White, A-D, 1996. "International taxation," Papers 96-11, Wellesley College - Department of Economics.
  20. French, Kenneth R & Poterba, James M, 1991. "Investor Diversification and International Equity Markets," American Economic Review, American Economic Association, vol. 81(2), pages 222-26, May.
  21. Finn, Mary G., 1990. "On savings and investment dynamics in a small open economy," Journal of International Economics, Elsevier, vol. 29(1-2), pages 1-21, August.
  22. Murphy, Robert G., 1984. "Capital mobility and the relationship between saving and investment rates in OECD countries," Journal of International Money and Finance, Elsevier, vol. 3(3), pages 327-342, December.
  23. Adler, Michael & Dumas, Bernard, 1983. " International Portfolio Choice and Corporation Finance: A Synthesis," Journal of Finance, American Finance Association, vol. 38(3), pages 925-84, June.
  24. Harry Grubert & Timothy Goodspeed & Deborah L. Swenson, 1993. "Explaining the Low Taxable Income of Foreign-Controlled Companies in the United States," NBER Chapters, in: Studies in International Taxation, pages 237-276 National Bureau of Economic Research, Inc.
  25. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November.
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