The coordination of capital income and profit taxation with cross-ownership of firms

This paper investigates the scope for international coordination of capital income and profit taxation in a world of many symmetric countries. In the open economy, the authorities can levy a residence-based saving tax, a source-based investment tax and a profit tax. The tax mix is determined by the foreign ownership of domestic firms, if any, and the extent to which the profit tax is feasible. National capital taxes in general imply 'tax exporting' and 'tax base shifting', but an additional externality affecting the foreign saving tax is also identified. Generally coordination of capital income taxes in open economies is called for. Conditions under which coordination implies an increase or a decrease of the saving-investment tax wedge are provided. (C) 2002 Elsevier Science B.V. All rights reserved.