Working Paper: NBER ID: w10630
Authors: Assaf Razin; Efraim Sadka
Abstract: The behavior of taxes on capital income in the recent decades points to the notion that international tax competition that follows globalization of capital markets put strong downward pressures on the taxation of capital income; a race to the bottom. This behavior has been perhaps most pronounced in the EU-15 following the single market act of 1992. The 2004 enlargement of the EU with 10 new entrants put a strong downward pressure on capital income taxation for the EU-15 countries. Tax havens, and the inadequacy of cooperation among national tax authorities in the OECD in information exchanges, put binding ceilings on how much foreign-source capital income can be taxed. What then are the implications for the taxes on domestic-source capital income? The paper demonstrates that even if some enforcement of taxation on foreign-source capital income is feasible, a poor enforcement of international taxes would generate political processes that would reduce significantly the domestic-source capital income taxation.
Keywords: capital income taxation; globalization; international tax competition; EU tax policy
JEL Codes: F3; H2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| international tax competition (H26) | downward pressure on capital income taxation (E25) |
| poor enforcement of foreign-source capital income taxation (F21) | reduced domestic-source capital income taxation (F21) |
| foreign-source capital income taxation (f = 0) (F21) | domestic-source capital income tax (d = 0) (F21) |
| low enforcement level of foreign-source taxation (f) (F21) | low domestic tax rate (d) (H29) |