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Tax Principles and Capital Inflows: Is It Efficient to Tax Nonresident Income?


  • Assaf Razin
  • Efraim Sadka
  • Chi-Wa Yuen


Even though financial markets today show a high degree of integration, the world capital market is still far from the textbook story of high capital mobility. The failure to have a tax scheme in which the rate of returns across countries are equated can result in inefficient capital flows across countries. This comes from the interactions of market failure and the tax system. The purpose of this paper is to highlight some key sources of market failure in the context of international capital flows and to provide guidelines for efficient tax structure in the presence of capital market imperfections. We distinguish among three main types of international capital flows: foreign portfolio debt investment (FPDI), foreign portfolio equity investment (FPEI), and foreign direct investment (FDI). The paper emphasizes the efficiency of a non-uniform tax treatment of the various vehicles of international capital flows.

Suggested Citation

  • Assaf Razin & Efraim Sadka & Chi-Wa Yuen, 1996. "Tax Principles and Capital Inflows: Is It Efficient to Tax Nonresident Income?," NBER Working Papers 5513, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:5513
    Note: IFM

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    References listed on IDEAS

    1. Gordon, Roger H & Bovenberg, A Lans, 1996. "Why Is Capital So Immobile Internationally? Possible Explanations and Implications for Capital Income Taxation," American Economic Review, American Economic Association, vol. 86(5), pages 1057-1075, December.
    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. Paul A. Samuelson, 1956. "Social Indifference Curves," The Quarterly Journal of Economics, Oxford University Press, vol. 70(1), pages 1-22.
    4. Claessens, Stijn, 1995. "The Emergence of Equity Investment in Developing Countries: Overview," World Bank Economic Review, World Bank Group, vol. 9(1), pages 1-17, January.
    5. Bayoumi, Tamim & Gagnon, Joseph, 1996. "Taxation and inflation: A new explanation for capital flows," Journal of Monetary Economics, Elsevier, vol. 38(2), pages 303-330, October.
    6. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
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    Cited by:

    1. Anyangah, Joshua Okeyo, 2010. "Financing investment in environmentally sound technologies: Foreign direct investment versus foreign debt finance," Resource and Energy Economics, Elsevier, vol. 32(3), pages 456-475, August.

    More about this item

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General


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