NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Why is Capital so Immobile Internationally?: Possible Explanations and Implications for Capital Income Taxation

Roger H. Gordon, A. Lans Bovenberg

NBER Working Paper No. 4796
Issued in July 1994
NBER Program(s):   ITI   IFM   PE

The evidence on international capital immobility is extensive, ranging from the correlations between domestic savings and investment pointed out by Feldstein-Horioka (1980), to real interest differentials across countries, to the lack of international portfolio diversification. To what degree does capital immobility modify past results forecasting that small open economies should not tax savings or investment? The answer depends on the cause of this immobility. We argue that asymmetric information between countries provides the most plausible explanation for the above observations. When we examine optimal tax policy in an open economy allowing for asymmetric information, rather than simply finding that savings and investment should not be taxed, we now forecast government subsidies to foreign acquisitions of domestic firms. Some omitted factors that would argue against subsidizing foreign acquisitions are explored briefly.

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Document Object Identifier (DOI): 10.3386/w4796

Published: American Economic Review, vol.86, no.5, pp.1057-1075, December1996.

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