Working Paper: NBER ID: w2007
Authors: Lawrence H. Summers
Abstract: This paper examines the interactions between tax policy, international capitol mobility, and international competitiveness. It demonstrates that tax policies which stimulate national investment without affecting national savings must inevitably lead to deterioration in a country's trade balance in the short and intermediate run. This conclusion, which contradicts a great deal of popular rhetoric highlights the importance of considering the macroeconomic as well as the microeconomic aspects of tax changes. Yore generally, the effects of tax policies depend critically on the extent of the international capital flows which they generate. The paper examines the issue of international capital mobility both theoretically and empirically. A variety of considerations suggest that while tax policies could generate large capital flows, governments pursue policies which tend to inhibit capital flows following tax changes. This makes the analysis of tax policies difficult.
Keywords: Tax Policy; International Competitiveness; Capital Mobility; Trade Balance
JEL Codes: H25; F21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Tax policies that stimulate national investment but do not affect national savings (H54) | Deterioration in a country's trade balance (F14) |
| Increased investment attracting foreign funds (F21) | Currency appreciation (F31) |
| Currency appreciation (F31) | Reduced competitiveness (L49) |
| Tax policies that promote savings without affecting investment (H32) | Improved trade performance (F19) |
| Tax policies raising savings (H31) | Increase in domestic investment (E22) |