The International Transmission of Tax Policies in a Dynamic World Economy

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This paper analyzes the international transmission of tax shocks in a two-country infinite-horizon representative agent framework. In analyzing such shocks, the viability of the underlying tax regimes, arising from the arbitrage conditions characterizing equilibrium in a perfect world capital market, is emphasized. Conditions for both short-run and long-run viability are derived, and the two polar regimes of source-based and residence-based taxation discussed. In general, we find the fanner more likely to satisfy the viability conditions, than the latter. With equity financing, the long-run viability of residence-based taxation is likely to require the harmonization of tax and/or dividend policy. The main features of the dynamic adjustment paths following a tax increase are characterized.

Published: Review of International Economics, Vol. 1, Issue 1, pp. 49-72 (November 1992).

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