International Repercussions of Source-based Capital Income Taxation

International Repercussions of Source-based Capital Income Taxation

The paper is concerned with international effects of source-based capital income taxation in a large economy. We derive, within the context of a two-country overlapping generations model in continuous time, the implications of such taxation for the world interest rate and for investment, consumption, saving and external balances at home and abroad. Furthermore, we argue that higher source-based taxes will hurt foreigners alive at the time of the policy change, whereas future citizens abroad stand to benefit. Finally, the effects of source- and residence-based taxes are compared.