Working Paper: CEPR ID: DP1381
Authors: Assaf Razin; Efraim Sadka; Chiwa Yuen
Abstract: 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 non-uniform tax treatment of the various vehicles of international capital flows.
Keywords: capital inflows; foreign direct investment; foreign portfolio debt investment; foreign portfolio equity investment; international tax principles
JEL Codes: F21; F35; H25; H30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| tax policy (H20) | inefficient capital flows (F32) |
| market failures (D52) | inefficient capital flows (F32) |
| failure to equalize rates of return (G19) | inefficient capital flows (F32) |
| nonuniform tax treatment (H24) | efficiency of capital inflows (F21) |
| tax systems (H20) | capital mobility (F20) |