DP14096 Taxation and the External Wealth of Nations: Evidence from Bilateral Portfolio Holdings

Author(s): Harry Huizinga, Maximilian Todtenhaupt, Johannes Voget, Wolf Wagner
Publication Date: November 2019
Keyword(s): asset allocation, Capital income taxation, Foreign portfolio investment
JEL(s): G11, H24
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14096

This paper examines the impact of capital income taxation on the composition of foreign portfolio investment. Studying bilateral portfolio positions among a sample of 37 countries over the period 2001-2015, we find that capital gains and dividend taxation reduce the share of equities in foreign investments, while interest taxation increases this share. The results suggest that domestic capital income taxation affects the worldwide asset allocation of domestic investors. The estimated tax sensitivities imply a significant increase in country's external wealth following a tax policy change that stimulates investors to hold higher-yielding equity investments.