Must losing taxes on saving be harmful?

Abstract

Internationalization o¤ers enhanced opportunities for individuals to place savings abroad and evade domestic saving taxation. This paper asks whether the concomitant loss of saving taxation necessarily is harmful. To this end we construct a model of many symmetric countries in which public goods are …nanced by taxes on saving and investment. There is international cross-ownership of …rms, and countries are assumed to be unable to tax away pure pro…ts. Countries then face an incentive to impose a rather high investment tax also borne by foreigners. In this setting, the loss of the saving tax instrument on account of international tax evasion may prevent the overall saving-investment tax wedge from becoming too high, and hence may be bene…cial for moderate preferences for public goods. A world with 'highspending' governments, in contrast, is made worse o¤ by the loss of saving taxes, and hence stands to gain from international cooperation to restore saving taxation.JEL-Classi…cation: H87, H21

Capital Tax Competition and Cooperation with Endogenous Capital Formation

“…Batina () considered endogenous savings decisions in a model of overlapping generations, although his main focus was the condition in which a coordinated tax reform brings about Pareto improvement, extending the two‐period model of Krelove (). Huizinga and Nielsen (1997, 2002a,b, 2008) also took into account consumption‐savings choices in a two period model, although their main concern was the optimal tax mix of (residence‐based) savings taxes, (source‐based) investment taxes and/or profit taxes in the presence of cross‐ownership of capital from a more practical viewpoint.…”

“…Huizinga () uses such a two period model in analyzing investment and savings taxes in a small open economy with the model being extended by Huizinga and Nielsen (1997, 2002a,b, 2008).…”

“…In order to keep the analysis simple, the utility function is assumed to be separable between consumption of private goods and public goods. Such a utility function was also assumed in Huizinga and Nielsen (2002b, 2008).…”

“…This is an important difference from, for example, Wildasin (), who assumed that the residents (producers) in the regions rent capital from someone outside of these regions. For interregional cross‐ownership in more general cases, see, for example, Huizinga and Nielsen (, ).…”

“…Chari and Kehoe, ). Huizinga and Nielsen () also asserted that the closed economy's tax policy corresponds to the cooperative tax policy in a world of many identical small open economies.…”