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Optimal Taxation of Foreign Source Investment Income With Heterogeneous Households

Author

Listed:
  • Lih-Jau Wang

    (University of Wyoming)

  • Alfredo M. Pereira

    (University of California, San Diego)

Abstract

Using a two-country static general equilibrium model with two goods (tradables and nontradables) and heterogeneous households (laborers and capital owners), this article analyzes how real exchange rate and income redistribution affect the optimal taxation of foreign source investment income. It shows that if the home tradable good sector is capital intensive relative to the nontradable good sector and if the weight of capital owners in the social welfare function is sufficiently high, then the optimal tax rate on foreign source investment income is lower than the tax rate on domestic investment income. Numerical simulations suggest that a higher weight of capital owners in the social welfare function and a higher fraction of the multinational's capital exported from the home country are among the factors that lead to a greater (negative) differential between the taxes on foreign source and domestic investment income.

Suggested Citation

  • Lih-Jau Wang & Alfredo M. Pereira, 1994. "Optimal Taxation of Foreign Source Investment Income With Heterogeneous Households," Public Finance Review, , vol. 22(1), pages 103-134, January.
    • Handle: RePEc:sae:pubfin:v:22:y:1994:i:1:p:103-134
    DOI: 10.1177/109114219402200106
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    References listed on IDEAS

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    1. Horst, Thomas, 1977. "American Taxation of Multinational Firms," American Economic Review, American Economic Association, vol. 67(3), pages 376-389, June.
    2. Martin Feldstein & David Hartman, 1979. "The Optimal Taxation of Foreign Source Investment Income," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 93(4), pages 613-629.
    3. Ronald W. Jones, 1967. "International Capital Movements and the Theory of Tariffs and Trade," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 81(1), pages 1-38.
    4. Koichi Hamada, 1966. "Strategic Aspects of Taxation on Foreign Investment Income," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 80(3), pages 361-375.
    5. Murray C. Kemp, 1962. "Foreign Investment And The National Advantage," The Economic Record, The Economic Society of Australia, vol. 38(81), pages 56-62, March.
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