Working Paper: NBER ID: w2863
Authors: Assaf Razin; Efraim Sadka
Abstract: International-capital market integration has become a key policy issue in the prospective integration of Europe of 1992. In this context this paper provides a theoretical analysis of the effects of relaxing restrictions on the international flow of capital on the fiscal branch of government: the optimal provision of public goods, the structure of taxation and income redistribution policies. Concerning issues of interdependent economies the paper analyzes the scope of tax coordination. The major findings are: (a) with no administrative barriers to capital flows the optimal policy is to tax income from investment abroad and from investments at home at the same time; (b) the cost of public funds falls and the supply of public goods rises if restrictions on international capital flows are relaxed: (c) the amount of income redistributions increases with the international capital market liberalization; (d) some minimal degree of tax coordination (such as origin-based or source-based tax schemes) is essential for the existence of an equilibrium in an integrated world economy.
Keywords: International Capital Markets; Tax Coordination; Public Goods; Income Redistribution
JEL Codes: H21; F21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Relaxing capital flow restrictions (F32) | Lower costs of public funds (H49) |
| Relaxing capital flow restrictions (F32) | Increased public goods provision (H49) |
| Capital flow liberalization (F32) | Tax policy structure (H20) |
| Relaxation of international capital flow restrictions (F32) | Decrease in cost of public funds (H69) |
| Relaxation of international capital flow restrictions (F32) | Increase in public goods provision (H49) |
| Liberalization of international capital markets (F30) | Income redistribution (H23) |
| Capital mobility (F20) | Necessity for tax coordination (H26) |