Should Foreign Capital Be Taxed for Fiscal Expansion?

Should Foreign Capital Be Taxed for Fiscal Expansion?

This paper studies the income distribution implications of a fiscal expansion financed by foreign capital in a small open economy. Utilizing a multi-sector general equilibrium model, four results are derived for a stable equilibrium: (1) domestic private agents` welfare may be reduced by fiscal expansion even if agents do not finance the expansion; (2) the fiscal authority`s welfare may be reduced by fiscal expansion even if more resources are allocated for the authority`s consumption; (3) the after-tax rental income of the foreign capital`s owners may be increased even if they finance the fiscal expansion; and (4) fiscal spending may be contractionary for domestic residents (private agents and fiscal authority) even if the spending is financed by non-residents. (JEL Classification: F20, H30)