NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Tax Principles and Capital Inflows: Is It Efficient to Tax Nonresident Income?

Assaf Razin, Efraim Sadka, Chi-Wa Yuen

NBER Working Paper No. 5513
Issued in March 1996
NBER Program(s):   IFM

Even though financial markets today show a high degree of integration, the world capital market is still far from the textbook story of high capital mobility. The failure to have a tax scheme in which the rate of returns across countries are equated can result in inefficient capital flows across countries. This comes from the interactions of market failure and the tax system. The purpose of this paper is to highlight some key sources of market failure in the context of international capital flows and to provide guidelines for efficient tax structure in the presence of capital market imperfections. We distinguish among three main types of international capital flows: foreign portfolio debt investment (FPDI), foreign portfolio equity investment (FPEI), and foreign direct investment (FDI). The paper emphasizes the efficiency of a non-uniform tax treatment of the various vehicles of international capital flows.

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Document Object Identifier (DOI): 10.3386/w5513

Published: Journal of International Economics, 1997.

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