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Vanishing Tax on Capital Income in the Open Economy

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  • Assaf Razin
  • Efraim Sadka

Abstract

The increased integration of the world capital market implies that the supply of capital becomes more elastic, and therefore potentially a less efficient base for taxation. In general, the optimal taxation of capital income is subject to two conflicting forces. On the one hand the return on existing capital is a pure rent which is efficient to fully tax away. On the other hand taxing the returns on investment in new capital would retard growth, thus generating inefficiencies. Capturing these considerations, the paper carries out a simple optimal tax analysis for an open economy, which is fully integrated in the world capital markets. The analysis identifies well defined circumstances in which the capital income tax vanishes.

Suggested Citation

  • Assaf Razin & Efraim Sadka, 1991. "Vanishing Tax on Capital Income in the Open Economy," NBER Working Papers 3796, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:3796
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    1. Sinn, Hans-Werner, 1990. "Tax harmonization and tax competition in Europe," European Economic Review, Elsevier, vol. 34(2-3), pages 489-504, May.
    2. Razin, Assaf & Sadka, Efraim, 1991. "International tax competition and gains from tax harmonization," Economics Letters, Elsevier, vol. 37(1), pages 69-76, September.
    3. Jacob Frenkel & Assaf Razin & Efraim Sadka, 1991. "International Taxation in an Integrated World," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061430, December.
    4. Lucas, Robert E, Jr, 1990. "Supply-Side Economics: An Analytical Review," Oxford Economic Papers, Oxford University Press, vol. 42(2), pages 293-316, April.
    5. Gordon, Roger H, 1986. "Taxation of Investment and Savings in a World Economy," American Economic Review, American Economic Association, vol. 76(5), pages 1086-1102, December.
    6. Dixit, Avinash, 1985. "Tax policy in open economies," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 1, chapter 6, pages 313-374, Elsevier.
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    Cited by:

    1. Enrique G. Mendoza & Linda L. Tesar, 1995. "Supply-Side Economics in a Global Economy," NBER Working Papers 5086, National Bureau of Economic Research, Inc.
    2. Alfons Weichenrieder, 1996. "Fighting international tax avoidance," Fiscal Studies, Institute for Fiscal Studies, vol. 17(1), pages 37-58, February.
    3. Dehejia, Vivek H. & Weichenrieder, Alfons J., 2001. "Tariff jumping foreign investment and capital taxation," Journal of International Economics, Elsevier, vol. 53(1), pages 223-230, February.
    4. Thomas Döring & Oliver Fromm, 1995. "Koordinierungsbedarf für die direkten Steuern bei verstärkter politischer und wirtschaftliche Integration in der Europäischen Union," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 64(4), pages 624-641.
    5. Jiming Ha & Anne Sibert, 1997. "Strategic Capital Taxation in Large Open Economies with Mobile Capital," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 4(3), pages 243-262, July.
    6. Jiming Ha & Anne Sibert, 1997. "Strategic Capital Taxation in Large Open Economies with Mobile Capital," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 4(3), pages 243-262, July.
    7. Correia, Isabel H., 1996. "Dynamic optimal taxation in small open economies," Journal of Economic Dynamics and Control, Elsevier, vol. 20(4), pages 691-708, April.

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