Working Paper: CEPR ID: DP231
Authors: Alberto Giovannini
Abstract: This paper studies the welfare effects of international investment to evade domestic taxes on domestic investment income. Capital mobility for tax evasion eliminates distortions in the intertemporal allocation of consumption, but introduces distortions in domestic production. Conversely, a regime where residents pay taxes on all investment income, domestic and foreign, introduces distortions in intertemporal consumption allocation, but leaves domestic production distortion-free. The relative magnitude of the interest elasticity of savings and the interest elasticity of domestic investment determines the welfare effects of capital movements for the purpose of tax evasion.
Keywords: tax evasion; capital mobility; capital flight; capital controls
JEL Codes: 411; 433; 441
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| International capital mobility for tax evasion (F38) | distortions in domestic production (H31) |
| International capital mobility for tax evasion (F38) | eliminates distortions in intertemporal consumption allocation (D15) |
| Higher capital mobility (F20) | reduces domestic investment (E22) |
| Reduced domestic investment (E22) | lower domestic production (L49) |
| Domestic investments taxed while foreign investments not taxed (F21) | domestic investment declines (E20) |
| Domestic investment declines (E22) | decrease in output (E23) |
| Capital flight occurs as investors substitute foreign for domestic assets (F21) | fall in the domestic capital stock (E22) |
| Tax evasion (H26) | larger welfare losses when domestic and foreign investments are close substitutes (F49) |
| Welfare losses from tax evasion (H26) | larger when intertemporal substitution in consumption is low (D15) |