Taxation and the External Wealth of Nations: Evidence from Bilateral Portfolio Holdings
CentER Discussion Paper Series No. 2019-029
53 Pages Posted: 11 Nov 2019
Date Written: October 28, 2019
This paper examines the impact of capital income taxation on the composition of foreign portfolio investment. Studying bilateral portfolio positions among a sample of 37 countries over the period 2001-2015, we find that capital gains and dividend taxation reduce the share of equities in foreign investments, while interest taxation increases this share. The results suggest that domestic capital income taxation affects the worldwide asset allocation of domestic investors. The estimated tax sensitivities imply a significant increase in country’s external wealth following a tax policy change that stimulates investors to hold higher-yielding equity investments.
Keywords: Asset allocation; Capital income taxation; Foreign portfolio investment
JEL Classification: G11, H24
Suggested Citation: Suggested Citation