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

AMERICAN ECONOMIC REVIEW, Vol. 86, No. 5, December 1996

Posted: 20 Feb 1997

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)

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Abstract

The evidence on international capital immobility is extensive, including the lack of international portfolio diversification, real interest differentials across countries, and the high correlation between domestic savings and investment. We develop a model with asymmetric information between countries that helps rationalize all the above observations and then examine the implications of this model for optimal domestic tax policy. Without asymmetric information, past work showed that small open economies should not impose corporate income taxes. With asymmetric information, the optimal policy instead involves government subsidies to capital imports. Some omitted factors that argue against subsidizing capital imports are explored briefly.

JEL Classification: D82, F21, H25

Suggested Citation

Gordon, Roger H. and Bovenberg, A. Lans, Why is Capital so Immobile Internationally?: Possible Explanations and Implications for Capital Income Taxation. AMERICAN ECONOMIC REVIEW, Vol. 86, No. 5, December 1996. Available at SSRN: https://ssrn.com/abstract=4668

Roger H. Gordon (Contact Author)

University of California, San Diego (UCSD) - Department of Economics ( email )

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A. Lans Bovenberg

Tilburg University - Center for Economic Research (CentER) ( email )

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Centre for Economic Policy Research (CEPR)

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