Working Paper: CEPR ID: DP3084
Authors: Sylvester C. W. Eijffinger; Wolf Wagner
Abstract: This Paper analyses the tax competition and tax exporting effect of financial integration. On the one hand, financial integration increases capital mobility and thus the incentive for countries to compete for capital. On the other hand, financial integration increases foreign ownership of firms and capital and allows for exportation of source taxes. Both effects have contrary implications for capital taxes. Allowing for imperfectly mobile capital, our analysis suggests that currently the tax exportation effect is dominating, which implies excessive capital taxation. From studying the benchmark of full financial integration we find that capital taxes are likely to increase from current levels. We further examine the tax exportation effect empirically and find that is significant as well as quantitatively important for the US.
Keywords: capital mobility; cross-ownership; tax competition
JEL Codes: F20; H12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| financial integration (F30) | capital mobility (F20) |
| capital mobility (F20) | countries competing for capital (P12) |
| capital mobility (F20) | excessive capital taxation (F38) |
| foreign ownership (F23) | corporate tax burden (H22) |
| financial integration (F30) | foreign ownership (F23) |
| foreign ownership (F23) | tax revenues (H29) |
| tax exportation effect (H23) | corporate tax rates (K34) |
| tax competition effect (H29) | corporate tax rates (K34) |
| tax exportation effect dominates tax competition effect (H21) | corporate tax rates (K34) |