DP416 Capital Flight and Tax Competition: Are there Viable Solutions to Both Problems

Author(s): Alberto Giovannini, James R Hines Jr
Publication Date: May 1990
Keyword(s): Corporate Income Tax, Foreign Direct Investment, Foreign Tax Credit, International Capital Mobility
JEL(s): 320, 440
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=416

This paper discusses a model corporate tax system based on the application of the residence principle. This tax system, while preserving national sovereignties, minimizes the distortions arising from international capital mobility. The paper is motivated by an analysis of European capital income tax systems, and of the distortions that might arise as obstacles to international capital flows diminish. The alternative system that we analyse has two main properties: it exploits the territoriality of law enforcement, and it allows countries to set the corporate tax rate -- and the extent of double taxation of corporate income -- independently.