NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Vanishing Tax on Capital Income in the Open Economy

Assaf Razin, Efraim Sadka

NBER Working Paper No. 3796 (Also Reprint No. r2045)
Issued in August 1991
NBER Program(s):   ITI   PE   IFM

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.

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Document Object Identifier (DOI): 10.3386/w3796

Published: "The Status of Capital Income Taxation in the Open Economy," Finanz Archiv, vol. 52, pp. 21-32, (April 1995).

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