Must losing taxes on saving be harmful?

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Must losing taxes on saving be harmful?

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Title: Must losing taxes on saving be harmful?
Author: Huizinga, Harry; Nielsen, Søren Bo
Abstract: Internationalization offers enhanced opportunities for individuals to place savings abroad and evade domestic saving taxation. This paper asks whether the concomi- tant loss of saving taxation necessarily is harmful. To this end we construct a model of many symmetric countries in which public goods are financed by taxes on saving and investment. There is international cross-ownership of firms, and countries are assumed to be unable to tax away pure profits. 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 beneficial for moderate preferences for public goods. A world with 'high- spending' governments, in contrast, is made worse off by the loss of saving taxes, and hence stands to gain from international cooperation to restore saving taxation. JEL-Classifcation: H87, H21 Keywords: Capital income taxation, cross-ownership, coordination
URI: http://hdl.handle.net/10398/7535
Date: 2004-12-27

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