The Resource Balancing act : weighing the factors affecting the taxation of capital income in a small open economy

Balancing act : weighing the factors affecting the taxation of capital income in a small open economy

Label
Balancing act : weighing the factors affecting the taxation of capital income in a small open economy
Title
Balancing act : weighing the factors affecting the taxation of capital income in a small open economy
Creator
Subject
Language
eng
Summary
Alternative economic theories yield dramatically different prescriptions for optimal capital taxation in small open economies. On the one hand, foreign firms, including those with investments that yield firm-specific above-normal returns, have a large number of alternative investment opportunities; this suggests that the supply of foreign direct investment is highly elastic, which implies that small open economies should avoid imposing any source-based taxes on capital income. On the other hand, governments invariably want to tax any above-normal returns earned by location-specific capital, especially if the returns accrue to foreigners, and to take full advantage of the potential revenue increase from any "treasury transfer" effect that arises due to residence-based tax systems with foreign tax credits, such as that utilized by the USA. These factors suggest that investment is highly inelastic with respect to capital taxation, so that source-based capital income taxation is desirable; indeed, in one special case, the capital income tax rate for a small open economy should equal the relatively high US tax rate. Moreover, this difficult trade-off is in practice complicated by numerous additional factors: deferral of unrepatriated profits and cross-crediting of foreign tax credits for the US multinationals, foreign direct investment from firms from countries that, unlike the USA, operate territorial systems, and the existence of opportunities for both international capital income shifting and labour income shifting. In this paper, the authors analyze optimal capital income taxation in a small open economy model that attempts to balance these conflicting factors
Citation source
In: International tax and public finance. - New York. - Vol. 24 (2017), no. 1 ; p. 1-35
http://library.link/vocab/creatorName
  • McKeehan, M.K
  • Zodrow, G.R
Geographic coverage
International
Language note
English
http://library.link/vocab/subjectName
  • income shifting
  • corporate income tax
  • investment income
  • investment
  • source principle of taxation
  • foreign investment
Label
Balancing act : weighing the factors affecting the taxation of capital income in a small open economy
Instantiates
Publication
Label
Balancing act : weighing the factors affecting the taxation of capital income in a small open economy
Publication

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