TY  - JOUR
AU  - Feldstein,Martin
AU  - Hartman,David G.
TI  - The Optimal Taxation of Foreign Source Investment Income
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 193
PY  - 1980
Y2  - November 1980
UR  - http://www.nber.org/papers/w0193
L1  - http://www.nber.org/papers/w0193.pdf
N1  - Author contact info:
Martin S. Feldstein
President Emeritus
NBER
1050 Massachusetts Avenue
Cambridge, MA  02138-5398
Tel: 617/868-3905
Fax: 617/868-7194
E-Mail: msfeldst@nber.org

David G. Hartman
E-Mail: hartman@post.harvard.edu
AB  - Our paper begins with the relatively simple problem of optimal taxation as viewed by the capital-exporting ("home") country when it can assume that its actions do not alter the tax rate in the host country. Section I also shows that when foreign investment accounts for a significant fraction of production in the host country, the capital-exporting country should tax foreign source investment income more heavily than is implied by the "full taxation after deduction" rule. The important question of tax rate interdependence is developed in Section II. In the third section we replace the assumption that all foreign investment is financed by a transfer of equity capital from the home country with the more realistic description that subsidiary firms borrow in the host country. Although this raises the profitability to the home country of investment by its foreign subsidiaries, we show that this need not alter the conclusions of the previous sections. We regard the present paper as only a first step in a proper analysis of the complex issue of optimal taxation of foreign source investment income. . The static analysis of the present paper should be extended to consider investment paths in growing economics. Finally, the purely nationalistic optimality criterion could be generalized to give some weight to the real income of the rest of the world.
ER  -