Cross-Border Taxation in a World of Abundant Capital

Abstract

The tax rules governing investment in the United States offer highly favorable tax treatment to foreign investors: the typical foreign investor pays no U.S. tax on passive investment in the United States. These tax rules have been shaped by the assumption that the United States needs to attract scarce financial capital to fill the gap between domestic savings and investment. But that assumption is wrong; global financial capital is not scarce. Over the past three decades, regressive economic policies abroad have led to an overabundance of foreign savings. Instead of financing productive investment, the flow of those excess savings to the United States has financed unproductive consumption, fueling financial instability and a widening trade deficit. This Article calls for a reevaluation of U.S. inbound tax rules, proposing to increase taxation on foreign investment to address trade imbalances and enhance financial stability.

Keywords: Tax, International tax, Trade deficit