Simple Rules for the Optimal Taxation of International Capital Income

In this paper we reconcile and extend previous results on the collectively optimal taxation of international investment income. The “weighted average” rule of Horst (1980), for example, is shown to rest on unattractive assumptions on the set of instruments available, ruling out any need for distorting taxes. The principal contribution is to establish a new and strikingly simple weighted average rule — encompassing the other key result in this area — for the general case in which lump-sum taxes are unavailable, the ability to tax pure profits is perhaps restricted and distorting taxes on both domestic and border-crossing capital income are optimally deployed.