Capital Taxation May Survive in Open Economies

Michael Braulke

and

Giacomo Corneo

Why do capital taxes still exist in an integrated world economy? When capital is perfectly mobile across countries and labour is fixed, a source-based tax on capital both reduces and redistributes world income. In a simple general equilibrium model we show that under plausible circumstances there always exists a country that benefits from introducing such a tax. Countries that are richer in terms of human rather than financial capital tend to benefit from capital taxation.