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

33 Pages Posted: 10 Jun 2000 Last revised: 17 Aug 2010

See all articles by Roger H. Gordon

Roger H. Gordon

University of California, San Diego (UCSD) - Department of Economics; Harvard University - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

A. Lans Bovenberg

Tilburg University - Center for Economic Research (CentER); Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute)

Multiple version iconThere are 2 versions of this paper

Date Written: July 1994

Abstract

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.

Suggested Citation

Gordon, Roger H. and Bovenberg, A. Lans, Why is Capital so Immobile Internationally?: Possible Explanations and Implications for Capital Income Taxation (July 1994). NBER Working Paper No. w4796. Available at SSRN: https://ssrn.com/abstract=226999

Roger H. Gordon (Contact Author)

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A. Lans Bovenberg

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