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The Welfare Effects of a Capital Income Tax in an Open Economy

  • David G. Hartman
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    International capital mobility has typically been ignored in discussions of the welfare effects of the capital income tax. In the a typical analysis which does consider the open economy it is recognized that highly-elastic capital flows could significantly alter the usual conclusions. While there have been strenuous debates about the elasticity of international capital flows, there can be little disagreement that international ownership of capital is an important and growing phenomenon. In this paper, we explore the welfare effects of changes in the capital income tax from a different perspective: that of a country in which foreign ownership of a portion of the capital stock and foreign owners' payment of taxesis a reality. With this modification in emphasis, a simple graphical analysis is sufficient to indicate that international capital ownership could easily dominate other welfare effects of tax changes. At least, the arguments presented in this paper raise a caution about ignoring the openness of the economy simply because elasticities are believed small.

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    File URL: http://www.nber.org/papers/w1551.pdf
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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1551.

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    Date of creation: Jan 1985
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    Publication status: Published as "Taxation and the Effects of Inflation on the Real Capitol Stock in an Open Economy", International Economic Review, Vol. 20, no. 2(1979): 417-426.
    Handle: RePEc:nbr:nberwo:1551
    Note: PE
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